Children’s marriage – a financial goal?

In one of my earlier posts I had written as to why I do not consider the marriage of my children to be a life goal for me. I believe, they have been brought up in a way such that they can select their own partner for life when the time comes. Yes, as parents we will be supportive of it and may also interact with the families of their would be spouses according to the prevalent social norms but, neither my wife nor me, think that we have to initiate the process of finding a bride or groom for our children.

Some of the feedback I have received to the post is a pointer to what is wrong with our societal mindset till today. Sample some of this :-

  • If the girl is not having a good education, she may want to get married at the age of 22 or so. People saying this need to realise that if a girl is being brought up from her early childhood to simply get married after a perfunctory graduation, she is hardly going to have the motivation to do anything else in life. In this day and age, we as parents need to give wings to our girls, not shackle them with chains so early in life.
  • If a son is unable to find a suitable life partner on his own, it is the responsibility of his parents to do that for him. Well, I have no real issues with the parents taking an initiative in this matter as long as it is just for facilitation. Unfortunately, in most cases it turns out to be deterministic and two people, who have little going for themselves in terms of compatibility, get married to each other largely because their families are fine with it. The consequences, often, are quite disastrous.
  • Others said that while it was good in principle for the children to foot the bill of the marriage, how will they do it at such an early age etc. My thoughts on this are very simple – fund the marriages of your children to your heart’s content, as long as you can afford it without affecting what else you desire in life. If you are having a grand wedding but do not have enough money for your retirement years, then there is a lot wrong in how you are thinking through your decisions.

Having gone through those above, let us examine why I think it is a good idea to fund the marriages of children through them. We live in a very different world and social milieu today as compared to even 10-20 years back. At these times the parents were taking complete responsibility of their children till they got married and this included higher education as well as marriage. The underlying assumption was that the children, in turn, would take care of their parents, at least financially, when the time arrived. Today we dare not depend on such hopes as parents and therefore need to look at things with a lot more objectivity and logic rather than just filial emotion. The other thing that has changed is the cost of both higher education as well as marriage. Even 15 years back a B school degree used to cost about 3 lacs, today the same figure is close to 25 lacs. A degree in Engineering with associated expenses has gone up from 2 lacs to 16 lacs plus in the same period. So if you are sponsoring just the first graduation degree of your child you are probably paying more than what our parents paid for all these together.

Coming to the issue as to whether the children can fund their own marriages at such a young age. Well, I think that no son should marry till he is about 28 and this can probably be 25 or so for a girl. This will give then 4-6 years of working life which can be quite adequate to save up for the wedding. Of course, if they are paying a high student loan then the idea should be to pay it off first. Also, if you have the bandwidth as a parent to sponsor either a PG education OR the marriage, I will say choose the first.

I will write other posts on typical wedding costs and how these could possibly be funded by the children, but for now, let us look at a situation where you want to foot the bill. As long as you are being reasonable about the spending according to your own financial bandwidth there is nothing wrong with it. Unfortunately, Indian weddings today have become a spectacle of unmitigated desire to show off money, promoted by mindless and rather vulgar consumerism. I have seen many parents go completely out of the way, in order to show up their relatives and neighbours. At the end of the day, such reckless expenditure cravings often have rather sad endings.

My own experience here will not be out of order. I had worked for about 5 years and a bit when I got married to Lipi. Though I lived a good life as a bachelor in Delhi, I did manage to save a fair bit in those years. In 1993 the world in India was a different place and weddings were expensive affairs but not exorbitantly so yet. In order to comply with my mother’s wishes about how the wedding should be done, I ended up spending most of my accumulated savings and was quite happy to do so. I remember being so broke that Lipi had to sponsor the train tickets for our honeymoon in Panchmarhi. I never thought anything about spending for my wedding as my father had spent a lot of money for my education and those of my sisters. Yes, they were less expensive then but his salary as an Engineer in SAIL was also not a lavish one. 

So coming back to the core issue, is the marriage of your children a financial goal for you? Yes, if you want it to be but look upon it as the least priority item, after your own retirement and children’s education. If you have enough money, do what you want with it. However, if your children are unable or unwilling to take responsibility for their lives when they are 26-28 years of age there is a basic issue. Also, if you have brought up your daughter letting her think she just has to complete her graduation somehow and marriage is her only real goal in life, there really is a huge problem.

Coming to my children, I do hope they will choose their own partners when they want to get married. I will fund their marriage to the extent I deem logical but if they want to indulge in crass consumerism, they can foot the bill on their own. By then, they should be doing rather well in life and will be able to afford it quite well anyway.

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My cash flows and investments in April

April has been a good month for our markets with all the major indices hitting a lifetime high. My Stock and MF portfolio have done rather well and while I am not one to keep looking at my net worth every day, it does feel good to see it grow well in this month. For all people with an asset allocation strategy in place, this will be a good time to shift some money to debt. However, the question is which debt instruments will really work out in the current situation, where the interest rates are probably bottoming out?

I think it will be a good idea to outline my own situation in terms of the cash flows in April and how I have invested them in the month. These situations and decisions are unique to me but it can be definitely useful learning to some of the readers. Let me start with the cash inflow first. The month of April had significant cash inflows for me from the sources given below:-

  • My active Management consultancy income from the software company where I work currently as Chief Strategy Officer.
  • Some consultancy income from a couple of holistic life plans I have made for 2 people who had reached out to me.
  • Rent from my Chennai apartment which largely goes into paying for our current apartment in Hyderabad.
  • Interest income from tax free bonds
  • Dividend income from stocks in my portfolio
  • Dividend income from some MF schemes in my portfolio
  • Redemption proceeds of some FMP schemes on their maturity

My regular expenses that require cash outflow are as follows:-

  • Household expenses including rent for our apartment.
  • Amount sent to my parents every month for supplementing their income.
  • Expenses incurred on my children, separate from their college fees.
  • Any discretionary expenses including travel, entertainment and gifts.
  • Contribution to 2 charities of our choice.

As of now my passive income is enough to meet the above expenses in an ongoing manner and therefore my active income is almost totally invested. Besides for the FMP redemption proceeds, I invest the principal and use the capital gains as part of passive income. In April, the FMP redemption principal was to the tune of 11 lacs and this needed me to decide where should I put it back.

The investments I have done in April are as follows:-

  • PPF contribution to the maximum for my wife and me.
  • FMP plans from Reliance, Sundaram and BSL.
  • MIP from BSL
  • ICICI Value Fund series 12
  • Sundaram Micro cap fund series 11

Why have I invested in the following and will I be doing the same in May? The answer to the second part is no, as I look into each month separately now, keeping the overall asset allocation in mind. 

The first part has a more complex answer and I will try to provide it in the next post.

 

 

Debt investments which have worked well for me lately

As many of my readers will know well by now, I am a great advocate of the 3 portfolio strategy with Debt, Stocks and MF each having an important place. Of these, stocks and MF are typically for the long term and something I will normally not redeem in the next decade at least and maybe even later. Debt is different – in my FI state I depend on it for passive income and use some of this for my regular expenditure. 

One of the obvious approaches in debt investments is to understand the interest rate cycle and try to lock investments for a possible longer term, in order to maximise your interest earning out of these. While there is a bit of luck and speculation involved in this, if you are following the economy properly, it is possible to get these signals correct more often than not. A few of the situations in the past years which has really stood me in good stead are as follows:-

  • I normally put some amount as FD for my parents so that they get a monthly amount to supplement their income. I consolidated a larger amount in 2015 and locked it in for 3 years at a rate of 9.5 %. Current rates are 7.5 % only.
  • Despite several people advising me against it, I went ahead and invested in a big manner in the Tax free bonds of 2013-2014. The rates were close to 9 % and today it gives me an interest to meet nearly 25 % of my annual expenditure needs.
  • Our earlier POMIS matured in December 2015 with a rate of 8 %. I reinvested 9 lacs in a joint account with my wife at a rate of 8.4 %. Today the rate is 7.5 % or so.
  • In the 2013-2015 period I rolled over most of my FMP schemes as the rates of interest were favourable and it made sense to lock these in further. 
  • I also invested fresh into many FMP schemes as it seemed a good idea to have investments which locked into government papers at the then prevailing rates.
  • I continued my investments in PPF even though the rates kept coming down based on the alignment of Small savings schemes to the market rates. The EEE nature of it plus the possibility of a rate increase when the cycle reverses make it worthwhile.

While all of these were great till 2015 or so, since the last year, with the rates going down steadily with each RBI policy, Debt instruments have become more of a challenge. For all the instruments that are maturing today, one needs to look into alternatives that will give decent returns compared to a pure debt product.

In the meantime however, I am quite happy with the above decisions I had made. The best of them were definitely the investment in Tax free bonds.

Investing for your children? Invest in them instead

I often get asked about how I was able to positively influence my children into focusing at the right areas as far as their academic careers go. In reality much of it has been done by themselves, though I have been a constant presence. More importantly, I think many parents try to emphasise on the financial part of the education by investing for their children, so that they can pursue a course of higher learning, when the time comes. While this is definitely very important, a much more important aspect, often neglected, is what are you doing to invest in your children?

Whether we like it or not, parents remain the single most important source of influence for their children, till pretty much the teen years, when their peer groups and friends take over the role. If you are able to guide them properly and instil the right values in them during the pre-teen period then you would have done something really good for them. The mind of a child is akin to a blank canvas in the first 6 years after birth and this is really the right time to influence them in the right manner.

So how does one go about doing it? Well, for starters, even without any effort on your side, you have already played a role by just being their biological parents. The genes you have passed onto them will determine to a degree, how they turn out to be in future. In many ways, they will inherit your good qualities and unfortunately, most of your poor ones too. While this is something, you cannot do much about, how you come across to them is going to play a large part in the creation of their value system.

It is important to understand here that children learn the most from observing things. If there is a contradiction between what a parent is saying and doing, the child will pick up the second. Therefore, it is pointless to pontificate on the virtues of punctuality if you do not go to office on time yourself or are unable to keep some appointment you have fixed with your family. Yet, this is precisely what I have seen many parents do, time and time again. One of the key areas for you to look at as a parent is to achieve consistency between what you say and what you do. This will instil a core value in your child – words are important to honour, and your credibility as a parent will also be on a good footing.

So, in very simple terms, be a living example for your child. Whatever attributes you want him to pick up such as good manners, usage of proper language, honouring your commitments etc, must be things he sees and observes in you with unfailing regularity. Falling short of the standards ourselves and then complaining that our children have not grown up to be like how we wanted them to is really meaningless. 

How can you play a role in personality development of your child? The problem is most parents try to focus on what career they want their children to have, rather than what kind of individual persons they should grow up to be. Focus on the process and the outcome will take care of itself. Give confidence to the child that he/she can attempt all that they want, it is all right to fail at times. Our role as parents is to guide, provide for and facilitate – leave the acting to themselves. Building the self esteem of the child is really the most critical aspect of their growing up and we must never forget this. So, be it in studies, sports, music, reading or any other activities, encourage the child to try out the best possible and do not be worried about the results.

Specific to academics many parents get very agitated if their children are not doing well in school in terms of the marks that they get. It is important to be ambitious for your children but, here again, focus on the process and not the outcome. Try to guide them into being interested in what they are learning, once they are keen on that their efforts will be automatic and the results will follow. For example, if they develop an interest in Maths they will do well in it at whichever level they study it. Unfortunately, way too often we focus on short cuts, not realising that even if this brings in some short term results, the effects of these are not going to be lasting.

At the end though, you also need to steer them in the right direction when they falter. This will inevitably occur in their teens, when they are confused and a little insecure about how fast their world is changing. As a parent, you need to help them focus on the important stuff. I keep reminding my children that while college life must be fun and they need to have their fair share of it, it is also a crucial stepping stone to their future careers – one that needs to be on a firm footing. I think I recognise the potential and capability of my children, it is important for me to point it out to them.

Of course, in terms of directly being involved in their academic careers, I have been so from their early school days and continue to do so to the extent possible even today. I have been able to do it as they have chosen streams where I have a great deal of knowledge. However, even if they had studied Medicine or Commerce, the basic principles would have remained the same.

To summarise, help your children to become better human beings and they will be successful in whatever they choose to do. Even if you have not got their college fees covered, they can always get an Education loan. The question really is whether they can secure admission to a good college – that is something you can play a role in.

A case study from recent AIFW post

It always surprises me a little to see the reactions of people in Facebook groups when a group member asks a simple query. Some members assume that the questioner needs to get knowledge by reading blog posts of some other members first, others advise him to go to a fee only financial planner and even give him a list, yet others tell him that one should just keep working and not think of retiring.

To come back to the recent query, here are the salient facts shared by the person who wanted advice on whether he will be able to gain Financial independence in 6 years:-

  • He has 1.2 crores in FD and another 30 lacs in equity etc
  • Can invest 20000 per month for next 6 years
  • Has a child in class 7, who should be going to college in 6 years
  • Has his own house and loans will be paid for by the time he is 50.
  • Current costs are 1 lac per month, 15000 for child and includes loan repayments.

Let me come to the question as to whether he will be able to be financially independent by the time he is 50. For this we will calculate his Financial Independence Number (FIN) in the following manner.

  • His base cost at 50 will be lower than 1 lac as child cost will be gone and so will the loan repayment. However, let us take it at 1 lac to take care of inflation etc.
  • For retirement of 30 years his cost will be 3.6 crores at zero real rate of return
  • For child higher education we can take 20 lacs
  • For asset replacement etc we can take 20 lacs
  • Total FIN therefore comes to 4 crores.

Fortunately, in real life we do not need to go with financial planner and/or calculators blindly and can use some experience and common sense. It is difficult to tell others what to do as they will have their own goals and ways. However, if I were in his place, I would be doing the following:-

  • As his child’s college education is 6 years away, I will put 10 lacs in an Aggressive Balanced fund like HDFC Prudence. This amount will take care of the 20 lacs that will be required for the child’s graduation.
  • I will redeploy the 1.1 crore left in FD to different types of Debt funds. Assuming a CAGR of 8 % this will grow to an amount of 1.75 crores.
  • His current equity investment will grow to 60 lacs if we take 12 % CAGR over 6 years.
  • 20000 SIP @ 12 % returns will grow to about 21 lacs in 6 years.
  • So at 50 years he will have 1.75 crores in Debt and 81 lacs in equity

Let us now look at deployment of corpus. In the first 10 years of retirement, his strategy can be the following:-

  • Interest from Debt portion will be to the tune of 14 lacs @ 8 % returns. This is definitely possible if he is into good quality Debt instruments.
  • As his child is in college and he is still relatively young, I will not reinvest this 2 lacs but spend it in discretionary expenditure such as travel or asset replacement.
  • At the end of 10 years, he will be 60 so the activities will reduce and on the balance his medical expenses may grow. I think an annual expense of 18 lacs will be enough. There is no need to calculate this by inflation formula – makes no sense at all to do so.
  • Assuming a 12 % return on equity his equity corpus will be 2.51 crores.

In the next decade his deployment can be as follows:-

  • Keep using the interest from Debt instruments and take out the remaining required amount from redeeming the principal.
  • Even after you finish the decade you will have some amount left in Debt instruments. I suggest you donate it to a charity of your choice.
  • Your equity investments would have grown to more than 7 crores by now and will be more than enough to last your life as well as live a legacy.

So to come back to the basic query – will you have enough to retire at 50? You bet you will. Now just shut out all the negative people with negative comments from your mind and go ahead with the plan. Honestly, if you are able to get the selection of instruments done on your own, you do not even need a Financial planner.

Will be happy to receive comments, feedback and criticism on the post.

FMP redemption – a case study in April

As all my regular readers will know, a lot of my debt investment have been historically into FMP instruments. The basic premise of this is simple – it is a safe investment with relatively stable interest rates you can lock into for 3 years or more, the indexation benefits are good and consequently the taxes are reasonably low. If you want to read more about why I invest in it you can go through the FMP related blog posts.

The way I approach FMP redemption proceeds can be summarised as below:-

  • The capital gains are used for my regular expenditure if required. These form a good part of my passive income stream and, more often than not, I use it for some discretionary expenses.
  • I normally reinvest the principal amount in some other debt instrument, it could be FMP again or something else depending on the context of time.

So far in April, 3 of my FMP investments have been redeemed and the overall details are as follows:-

  • The principal amount in these three were 7 lacs.
  • Total capital gains arising out of these redemption is 2.25 lacs. In terms of XIRR it translates to around 9.75 % which is pretty good.
  • At this point in time, I do not really need the capital gains for my expenditure. This is mainly due to my active income through Consultancy which is more than adequate to take care of my regular and discretionary expenses.

Based on the above considerations I have decided to invest 9 lacs out of the redemption amount. In the present interest rate cycle, investing in pure debt products will really not make sense. As such, I am looking at the following distribution:-

  • Dual advantage FMP which invest in equity to a small extent.
  • Close ended equity funds such as Sundaram long term micro cap fund.
  • Equity savings funds.
  • MIPs
  • Funds such as ICICI Balanced Advantage fund or Edelweiss Absolute Return fund.

As some of these funds are dependent on market levels, I will be waiting for the annual results to be out. My feeling is Nifty will get down to below 9000 levels shortly and that will be a good time for me to buy these instruments.

 

MF portfolio realignment – my plan

If you are a regular reader of my blog you will know my 3 portfolio strategy for investment by now. I have portfolios in Debt, Stocks and MF. In the initial part of my working life I invested in mostly debt, the mid part was largely used to build up the stock portfolio and 2008 onward till now it has been largely MF. Of course, once I decided about giving up my regular corporate career in 2012, I boosted my debt portfolio significantly.

Over the years I have bought several MF schemes, initially with one time investments, thereafter with SIP and now back to investing at the right times. I have therefore collected a large number of MF schemes and in several of these the amounts invested are not very significant. The ones where I have done SIP obviously have some decent amounts, but even here there are several funds as my portfolio had changed over my 7 years of SIP.

In the past whenever the markets have gone up significantly, I have thought about cleaning up my MF portfolio. Somehow or the other it has never happened and I am stuck with a multitude of MF schemes, most of which I do not really want to keep. This weekend, I took a look at my MF portfolio after a long time and these were my observations.

  • I am currently investing in 4 MF schemes which are as follows. My plan is to continue investing in these for the future, at least till I have active income to do so:-
    • ICICI Focused Blue chip fund
    • ICICI Value Discovery Fund
    • HDFC Mid cap opportunities Fund
    • DSP BR Mid and small cap Fund
  • There are some other funds where I have significant investments but have dropped now. I will be keeping these for now but may want to sell them off during any annual review that I undertake. Future investments in these are unlikely:-
    • HDFC Top 200 Fund
    • IDFC Premier Equity Fund
    • Birla SunLife Frontline Equity Fund
    • DSP BR Equity Fund
    • Sundaram Select Mid cap Fund
    • Franklin India Blue Chip Fund
    • UTI Dividend yield Fund
  • There are some Close ended funds such as the ICICI Value Series Funds. I had invested in these as they give regular dividends which is useful to me. I will either continue with them or shift to other similar funds. To give readers an idea, ICICI Value Series 2 has given an XIRR of 30 % plus in the 3 year investment period.
  • Everything else, I want to get red of ASAP.

How do I plan to go about it? I have a feeling that next few weeks may be the best chance if Nifty goes to 9300 etc. Once the quarterly results  are through and the global geopolitical situation worsens, our markets are very likely to down to 8500 or even below that on the Nifty. Once I sell all my disposable MF, I will just be in cash and wait for the right opportunity.

What will I be buying with the cash I get? Well, one option is to invest in some of the stocks I had outlined in the earlier post. I am sure that if I buy these at Nifty levels of 8500 I will definitely see significant returns over the next 3 years etc. Another option will be to space out the stocks and invest in my 4 MF’s .

Unless the NIfty shows a rising trend due to a strong quarterly results, I am finally ready to pull the trigger on this. Even if it keeps rising, I will still sell when it reaches 9300, as I do not believe that is a value at which the Nifty can sustain itself.