Why you should plan for your child education







Introduction

College is expensive, and it's only going to get more expensive. Tuition costs continue to climb at a rate significantly higher than the inflation rate. In fact, on an average, the cost of college doubles about every nine years. This means that for a child born today, once they enter college, the college costs will be nearly four times what they are now. You can help your child pay for college by saving (and saving early!), but before you open any accounts, be sure you understand your situation, and your options.

The most valuable gift that the parents can give to their children is good quality education. At the same time, it is also the most expensive gift. We ask our children what they want to be when they grow up. And as parents, we must ensure that this goal is met and that we have adequate funds to meet this financial need.

This still leaves you with the job of finding out how much you need to save regularly. Let us assume that you need Rs 15 lakhs in today’s terms or Rs 60 lakhs in 18 years time for your child’s college education. If you start in the child’s first year, you need to invest Rs 10,000 every month assuming that your money grows by 10 per cent. Suppose, you delay this by a year, this monthly investment amount goes up to Rs 11,200 and to about Rs 12,700 if you begin when your child is three.

By starting a savings plan early, even before your child begins elementary school, you can reduce the burden of taking on high debt to pay for his or her higher education.
Aspects that dictate your planning

Timing

Timing is of the essence; once a child is born, you have an 18 year timeframe post which the need for higher education will arise. As a thumb rule, the minimum investment time is 18 years, i.e. when the child is born. Unmarried individuals can increase the time duration by adding 18 years to the probable year of having first child after marriage.

Cost of education

Planning should be done for the costliest education available. No one knows which stream the child may adopt. Having surplus funds is an added advantage.

A thorough analysis is required to determine the cost of education. Just assuming a random figure will not solve the purpose. Apart from the tuition fee, other expenses like boarding & lodging expenses, Books and stationary, uniform (if any), electronic accessories like tablet, laptop etc. must also be kept in mind.

Inflation

 An inflation of 8% will double the cost of education in 9 years. If the inflation is 6%, it will take about 12 years. So, inflation assumption is critical in planning your finances.

What to look for in an investment?

SLR (Safety, Liquidity and Returns) are the three features to look for before investing.  Safety means the soundness of the issuer to repay the principal along with interest. Higher the safety, lower the return. Conversely, Higher the risk, higher the return. Liquidity refers to the quickness with which you can convert your investment into cash. ‘Higher the liquidity, lower the return’. Returns are the income earned over the investment by way of interest, dividend, capital gains, appreciation etc.

Which financial instrument to invest in

The instruments available for investment these days include equity shares, government securities, corporate bonds, bank deposits, saving bonds, Kisan Vikas Patra, National saving certificates, post office time deposits, insurance, mutual funds and money market instruments.

Investing in mutual funds is an excellent way to secure your child’s educational future. The biggest advantage of investing into mutual funds is that equity mutual funds can generate inflation beating returns over long term with added advantage of zero capital gains tax. Mutual funds are managed by professionals who have the expertise in cherry picking stocks and they are also highly diversified across stocks and sectors. In the mutual funds space, parents can create a diversified portfolio for the purpose of funding their children’s education.

· Open a minor account

· Greater than 5 years before the college enrollment, a diversified portfolio consisting of large cap equity funds and debt funds will be ideal

· Less than 5 years before the college enrollment, the portfolio should increase allocation towards debt and balanced funds

· Review the portfolio on a regular basis to check if the funds are performing as expected.

Conclusion

So when it comes to saving for college, keep these things in mind:

·         It is better to have money in the bank than to NOT have money in the bank.

·         It is better to save than it is to borrow.

·         The earlier you start saving the better it is

·         In most cases, your savings will not impact your child's eligibility for student aid.


To sum it up, start with identifying the time period and the present day cost of education. After that, using inflation assumption, calculate how much money is needed in future. Invest in a diversified portfolio which could beat the inflation.

Help from an expert financial planner

Apart from the child’s future, there are other priorities as well like retirement, medical expenses, housing, etc. You should never dip into the funds save for these priorities to invest for your child. Planning better would be sensible and for that you can take help from an expert financial planner.

ORO is an investment platform for informed investors to make the right decisions. We offer comprehensive financial advisory services powered by our team of world-class experts. Get in touch with us and we will help you plan your child’s educational future.


What is the difference between the growth and dividend option in MFs





As a mutual fund investor, it becomes a challenging task to understand the difference between growth option, dividend payout option, and dividend reinvestment option of mutual fund schemes and choosing the best option as per individual requirements.

We have summarized how each option is different from the others and how their individual tax implications are:

Growth Option

Growth option means that an investor won’t receive any profits in the form dividends that may be paid out by the mutual fund scheme. If any profit is generated by the scheme, this amount gets invested back into the scheme which results in an increase in its NAV. In this plan, units of investors remains the same but the NAV increases as profits keep getting added and compounded over time thus giving higher capital gains at the time of redemption. This option is best suited for investors who don’t need regular income in the form of dividends.

Tax Implications of Growth Option

Equity: Only Capital Gains Tax
Short Term (holding period of less than or equal to 1 year): 15% on the capital gains
Long Term (holding period of more than 1 year): ZERO tax on the capital gains

Debt: Only Capital Gains Tax
Short Term (holding period of less than or equal to 3 years): Rate is based as per income tax slab, on the capital gains
Long Term (holding period of more than 3 years): 20% on the capital gains with indexation benefit

Dividend Payout Option

Dividend Payout option means that the profit generated by the scheme will be distributed to investors in the form of dividends. Dividend can be paid out on monthly, quarterly, half-yearly or annual basis but there is no guarantee of frequency and amount of dividend. It is solely at the discretion of the fund manager and whether the scheme has any profits to distribute. If the scheme is making a loss, dividend need not be declared. Whenever the dividend gets declared, the amount of dividend gets deducted from the NAV of the scheme thereby bringing the NAV down.  

The scheme deducts dividend distribution tax (DDT) in debt schemes before paying out the dividend to investors. DDT is only applicable in case of debt funds and is paid by the mutual fund scheme from the distributable income at a rate of 28.33% (including surcharge and cess).

The dividend received by the investors is tax free in the hands of the investor in case of both equity and debt schemes.


Tax Implications of Dividend Payout Option

Equity:
Dividend Distribution Tax: ZERO
Short Term (holding period of less than or equal to 1 year): 15% on the capital gains
Long Term (holding period of more than 1 year): ZERO tax on the capital gains

Debt:
Dividend Distribution Tax: 28.33% of dividend declared
Short Term Capital Gains Tax (holding period of less than or equal to 3 years): Rate is based as per income tax slab, on the capital gains
Long Term Capital Gains Tax (holding period of more than 3 years): 20% on the capital gains with indexation benefit


Dividend Reinvestment Option

Dividend Reinvestment option means that the profits generated by the scheme is not distributed to the investor in the form of cash dividends but is distributed in the form of additional units in the scheme. The dividend amount is used to purchase more units in the same scheme. This increases the units of the investor in the scheme and profit can be realized in the form of capital gains at the time of redemption.
  
Tax Implications of Dividend Reinvestment Option

Equity:
Dividend Distribution Tax: ZERO
Short Term (holding period of less than or equal to 1 year): 15% on the capital gains
Long Term (holding period of more than 1 year): ZERO tax on the capital gains

Debt:
Dividend Distribution Tax: 28.33% of dividend declared
Short Term Capital Gains Tax (holding period of less than or equal to 3 years): Rate is based as per income tax slab, on the capital gains
Long Term Capital Gains Tax (holding period of more than 3 years): 20% on the capital gains with indexation benefit


Conclusion

For a Debt MF investor who wants to invest for the short term (holding period of less than 3 years) and who are in the 30% income tax slab, Dividend Options are better than the Growth Option in terms of tax implications.

For an Equity MF investor, if the holding period can be greater than 1 year, Growth Option is much better than Dividend Options.


How to link Aadhaar to Mutual Fund folios online





As per recent amendments to Prevention of Money Laundering Act (PMLA) Rules, 2017, it is mandatory to link your Aadhaar card to all Mutual Fund folios by 31-Dec-2017. 

Please link your Aadhaar Card with the following RTA's, each RTA's processes funds for specific AMC's, find the list as below:

*RTA links for Aadhaar Linking-* 

*CAMS* 

*KARVY* 
_For Individuals-_

_For Non-Individuals -_ 

*FRANKLIN TEMPLETON* 

*SUNDARAM * 


LIST OF FUND HOUSES SERVICED BY RESPECTIVE RTA’s:
  
CAMS:
Aditya Birla Sunlife Mutual Fund
HDFC Mutual Fund
ICICI Prudential Mutual Fund
DSP BlackRock Mutual Fund
IDFC Mutual Fund
HSBC Mutual Fund
IIFL Mutual Fund
Kotak Mutual Fund
L&T Mutual Fund
Mahindra Mutual Fund
PPFAS Mutual Fund
SBI Mutual Fund
Shriram Mutual Fund
TATA Mutual Fund
Union Mutual Fund
  
KARVY:
Axis Mutual Fund
Baroda Pioneer Mutual Fund
BOI AXA Mutual Fund
Canara Robeco Mutual Fund
DHFL Pramerica Mutual Fund
Edelweiss Mutual Fund
Essel Mutual Fund
IDBI Mutual Fund
India Bulls Mutual Fund
INVESCO Mutual Fund
JM Financial Mutual Fund
LIC Mutual Fund
Mirae Asset Mutual Fund
Motilal Oswal Mutual Fund
Principal Mutual Fund
Quantum Mutual Fund
Reliance Mutual Fund
Taurus Mutual Fund
UTI Mutual Fund

Sundaram:
Sundaram Mutual Fund
BNP Mutual Fund

Franklin:
Franklin Templeton Mutual Fund