Facts of the case:

If I were to ask 10 parents what is the single most important thing to you in your life most likely that all would say “the future of our children”

You want to give the best to your children. You want to see the future that you have been dreaming about through the eyes of your children. You dream for them the dreams that you could not achieve yourselves. That is why you are so emotionally about the future of your children. Mr. Elvis D’Souza feels the same way for his daughter Rose who is 1 years old. Elvis is 34 today and his wife together earn about Rs. 7 lacs per annum. But that is not so important.

Diagnosis of Financial Health

Mr. Elvis D’souza and is wife have a combined salary of 7 lacs. He has created for his daughter Rose assets worth Rs. 3.5 lacs and she is just 1 years old. First let us understand what he did to achieve this. Before she was born in 2005 he put aside Rs. 3 lacs for her. What did he do? He had investments in his name and simply in his mind he decided some equity shares and mutual funds now belong to Rose. To make things formal he opened a bank account in her name and then transferred the money there and continued with the same investments. So far he has made a profit of Rs. 50,000. But that’s ok.

Assumptions considered

• Inflation assumed @ 4% p.a.
• Growth rate for long term goals / equity investments assumed @ 15% p.a.
• Growth rate for short term goals / fixed deposits and bonds assumed @ 6 – 8% p.a.

Case Analysis

What is interesting is his grand plan, which is to gift her Rs. 1 crore by the time she is 25.

He did not need any mathematician or agent or broker to tell him that expecting a compounded rate of return of 15% p.a. for investment in shares and equity mutual funds 3 lacs would become approximately 1 crore. Just that simple!

Now let’s get into his mind and explore his logic.

First he wanted to gift her Rs. 1 crore and with his assumptions of 15% that is so realistic. There is no chance in my opinion that this will not happen. Secondly, he wanted to basically create a level of funding by which he would never have to dip into his pocket ever again for financial needs of his daughter. Thirdly, he hopes that he will be able to meet all her expenses till she gets married from his ongoing salary but just as a hedge if he is not able to support her she should not suffer. So he took away a part of his investments, 3 lacs to be precise and labeled it as “This belongs to Rose.”

You might want to know why 3 lacs? And no other figure? It is a worst case scenario figure. Here is a quick snapshot of some cashflows he worked out, assuming a return on investment of 15% p.a. compounded.

Just to understand lets take wedding for example. He would like to spend 10 lacs, the future value at 4% inflation would be 24.64 lacs and to reach this goal he needs to put away 99,000 today. Likewise simply totalling all the amounts he needs today it works out to 2.86 lacs so he puts away 3 lacs of funds for Rose. Now if he can manage the above from his earnings she gets a gift of Rs. 1 crore when she is 25. For some reason if he cannot support her all her major expenses are managed without any worries as seen above. Even if he managed just half of the above Rose will still get a gift of Rs. 50 lacs. If he sees 3 or 4 stock markets boom period in the next 24 years all expenses will get managed and Rose will still have her Rs. 1 crore. Just that simple!

FP Strategy & Actions Plan

You would like to provide your children the best that is possible. As soon as we have children we think about Insurance policies, we think about making investments in their names. Elvis realizes that no single education or child based product will help him achieve his objective, so he totally avoids all insurance policies and his strategy would be shares and equity mutual funds. He wants to give his child a great future, financial security, wants her to enjoy her life so that she does not have to compromise on anything.