Be a financial Santa to your child this Christmas

Christmas is that time of the year, which most of us look forward to taking it easy, enjoying the nip in the air, the Christmassy feeling, bonfires, delectable food, and gifts from a Secret Santa. Children, in particular, are full of joy hoping to receive galore of gifts from Santa.

Parents can bring much joy to the future of children if they don the hat of a Financial Santa. A Roman Stoic philosopher, statesman, dramatist, and humourist of Latin literature, Lucius Annaeus Seneca has richly articulated, “A gift consists not in what is done or given, but in the intention of the giver or doer.”

A thoughtful financial gift will go well-appreciated, make a lasting impact, enabling parents to bring a positive change and strengthen the family bond.

Here are four financial gifts parents should consider to make their children feel distinguished and proud.

1. Prudent investments in mutual funds – In this day and age where inflation is eroding the purchasing power of our hard-earned money, making productive investments that potentially clock better inflation-adjusted returns (also known as the real rate of return) and that are tax-efficient necessary.

Mutual Funds are a potent avenue for wealth creation, and investments can be done in the name of minor children with one parent standing in as guardian.

That being said, parents need to prudently select mutual fund schemes across various categories of funds for their child’s financial future. There are specific Children’s Funds’ of course, but these are not the only solution.

Depending on the risk appetite, the investment objective, the financial goal (viz. child’s higher education, wedding expenses, etc.), and the time horizon before the financial goals befall, a mutual fund should be selected across categories and sub-categories by assigning weights to each of them sensibly.

And to plan for long-term goals, investors should not ignore Systematic Investment Plans (SIPs). SIP is an efficient mode of investing in mutual funds: instils the good habit of investing regularly; lighter on the wallet; helps mitigate market volatility (enabled by the rupee-cost averaging feature); facilitates the power of compounding, and is an effective medium for goal planning.

In short, SIP-ping into mutual funds is a rewarding strategy in itself.

To pick the best mutual funds to SIP or even to invest a lump sum, a financial advisor would render a valuable advice evaluating a host of aspects, including the financial health of the parent, the risk profile, the current age of the child, and the number of years-to-go before the envisioned financial goals realise.

2. Gift gold – Gold, has always been a mark of wealth carrying an immense store of value, looked up to as a safe haven in times of economic uncertainties, and served to be an effective portfolio diversifier.

In India (the world’s second-largest consumer of gold), gifting gold is part of its culture and rituals. Plus, gold has been passed on to generations, strengthening family bonds.

This Christmas, parents, instead of gifting physical gold (bars, coins, jewellery) to children; consider gifting gold the smart way –– in the form of a Gold ETF and/or a Gold saving funds.

Gold ETF is an open-ended Exchange Traded Fund (offered by mutual funds) which tracks the price of gold and each unit represents ownership of the gold asset. Each unit of gold in the gold ETF that the investor buys is equal to 1 gram of gold (some mutual fund houses also offer 1 unit at 0.5 gram of gold). However, the gold is held on the investors’ behalf by an appointed custodian for the ETF.

Gold ETFs can be purchased on the stock exchanges (demat and share trading account is a must). And when the investor buys gold ETF, it points to a contract indicating his/her ownership in gold equivalent in rupee terms.

Likewise, a gold saving fund (also known as a gold fund), is a kind of ‘fund-of-fund’ scheme that invests its corpus into an underlying Gold ETF, which benchmarks the performance against the physical prices of gold. It attempts to provide returns that closely correspond to the returns of its underlying Gold ETFs.

The above ways of investing in gold are of course paper forms; but here are the advantages:

• Convenient to invest in gold at prevailing market price (No premiums involved as in case while buying physical gold)
• The investor need not worry about storage and security aspects
• There’s no question as regards the quality
• Compared to physical gold, the cost of holding gold in paper form is low
• Ensures high liquidity: it can be easily sold in the time of need, at the prevailing market price without questioning the quality

Do note that over the long-term, gold as an asset class has exhibited an uptrend and performed reasonably well highlighting the importance of owning gold. So, investors should strategically allocate around 10-15% of their entire investment portfolio to gold and hold it with a long-term investment horizon.

3. Gift financial board games – Parents need to impart key money management lessons to children right from an early age. Introduce children to a few board games associated with money such as Monopoly, Game of Life (similar to monopoly), Cashflow (inspired by Robert Kiyosaki’s Rich Dad, Poor Dad teaches how to be in better control of your finances), Payday (teaches how to manage monthly budgets), etc.

When parents shepherd and engage children intelligently through these games, financial learning becomes interesting and it enables children to manage their personal finances deftly when they grow up.

“The single most powerful asset we all have is our mind. If it is trained well, it can create enormous wealth in what seems to be an instant.” – Robert Kiyosaki (a celebrated investor and author)

Parents consciously need to impart the right financial education to children at the right age, and in addition, be a role model. To prepare children for financial independence in the real world, this is one of the best gifts parents can give.

4. Buying an optimal insurance cover – Parents, particularly the breadwinner, should ensure that he/she is optimally insured because not having an optimal insurance cover could jeopardise children’s financial future.

Insurance is for indemnification of risk and protects dependents from a financial loss in the case of an unfortunate event. One should hold an optimal insurance cover for both, life and health.

A life insurance policy should be bought with the core objective of indemnifying the risk to life -- in a way that dependents are financially secured. Ideally, life insurance and investment needs should be dealt with separately. To address the former, a simple pure life-term insurance plan is by far the best.

Term Plans have the lowest premium structure. They are cheaper compared to insurance-cum-investment policies and provide a better cost-to-benefit advantage. In other words, against the premium you pay, the sum assured is much greater in comparison to an endowment, ULIP, money-back policies, and likes.

On the other hand, in case of insurance-cum-investment plans, a viz. endowment and money-back policy, against the premium paid the insurance coverage, usually, is sub-optimal and return on the investment component is nothing to vie for.

Similarly, health insurance coverage should not be overlooked. Today, healthcare cost is becoming dearer by the day, and the lifestyle we are exposed invites higher risk. Thus, not having optimal health insurance coverage for every family member, may endanger the financial wellbeing had you to foot a big fat hospital bill.

So, be the positive change in the life of your loved ones and touch their hearts. Make sure your gifts are a remarkable gesture.

Merry Christmas!

This Article was authored by Mr. Jimmy Patel, MD & CEO Quantum Asset Management Company Pvt. Ltd. and was published in Business Standard on December 22, 2019

Disclaimer, Statutory Details & Risk Factors:

The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. Please visit – www.quantumamc.com/disclaimer to read scheme specific risk factors.

Above article is authored by Quantum.

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