Personal Finance and Youngsters

Hi Sukanya! 

Congratulations! I have come to know from your parents that you got your first job. You must be very excited. Naturally. So am I. First few weeks have just flown away. You must have made new friends and I heard some of your college mates have also got job in the same company. Fun uninterrupted, right?

You are going to get your first paycheque soon. Good that you asked your mom, what to do with it. She was telling me that the other day. In response I thought of writing this letter to you. Old uncle - old habits!

My advice to you and your friends - let me sum that up in 4 heads - Insurance, Investments, Loans and Tax.

Insurance: 

Surprises hit us - better we remain prepared as far as possible. Start with setting up an emergency fund. Try to save and accumulate 3 times the amount of your net salary within next 6 to 8 months. If you manage to save 50% of your salary for first 6 months - you are done with it! Next is health insurance - also popularly known as mediclaim. In case of any health emergency where unfortunately you may need to get hospitalized - expenses that you incur upto a specified limit will be reimbursed to you - provided you pay a small premium every year. I know your employer is also going to cover you all under some group mediclaim policy. That is so nice of them but still you need to take health insurance cover on your own for two reasons - group mediclaim policy's features as well as terms and conditions may change anytime without your knowledge as it is under employer's discretion; Second, if you change your job in future - the policy that you have taken individually will come very handy. Remember that the premium that you are going to pay for your health insurance cover, you will be eligible to claim deduction from your taxable income for the same. (A quick note in this regard: If you pay for your parents health cover - you get extra tax benefits). If any of your friends' parents are financially dependent on them - partially or fully - it is necessary that they take life insurance cover also. Why not depend on employer provided life insurance cover instead? Same two reasons as mentioned above. And oh yes, premiums paid here also will be eligible for claiming deductions from your taxable income.  

Investments: 

Once you have protected yourself enough from unknown financial emergencies it is time to save for the rainy day. When you used to study any chapter from your college textbook it was always for some definite purpose. Same applies here. First think of an imaginary goal - that can be any - and set up a timeframe to achieve it. Now start investing towards it. It is not important that how much you are saving now - instead it is more important that you are controlling your urge to spend and saving something. If you have any goal which is beyond 5 years or so - investing in mutual fund ELSS scheme is a good idea then as it also allows you to claim tax deduction. And remember that at this stage 'investing in yourself' is necessary. What is that? That is learning new skills, studying more etc. That is the only way you can expect your salary to grow at an exponential rate in coming years.

Loans: 

Stay away from loans. Don't buy anything on credit. Buying an expensive gadget and paying 'interest free EMIs' is a trap that you must avoid. I understand that you can't show off your bank passbook or account statement and catch eyeballs - whereas if you would have bought those gadgets and cars - you could have shown off and become campus queen - but my dear friend has temptation and showing off taken anyone far? No. na? Also remember don't jump on the bandwagon of buying a home early. All you need is a roof above your head and if you are getting that from your parents by staying with them - then why this kolaveri di? Wait, first make big strides in your career and accumulate some good savings.

Tax: 

You can save tax by taking right insurance products and by making right investments - as mentioned above. If you are making contribution towards Employee Provident Fund from your monthly salary - that amount can also be claimed as deduction from taxable salary. Make sure that you understand every entry in your payslip first. Calculate your taxable salary after adjusting all the deductions. See how much you can save more then. But at this stage of life you should not sacrifice liquidity too much to save tax - at least beyond a point - because most of your current financial goals are short terms in nature and future course of life is also uncertain. 

Last but not the least - inculcate good financial habits now. No doubt that this is the age to spend money on consumables. You are no different. But try to understand the difference between needs and wants. It shouldn't happen that you buy something by paying your hard earned money and then not use that anymore after a month or so. 

Enough gyan! Enjoy your life with safety belts on. My blessings and best wishes are always with you. 

Yours truly,

'Investment Uncle'

Return on Mutual Fund

Any investment instrument which does not have a fixed annual return - can it ever have a compounding feature in it? 'Compounding' means what? It actually means earning "interest on interest". Does this happen in case of mutual funds or stocks? No. Mutual fund or stock or for that matter any investment instrument which has a volatile return associated with it - can only 'appreciate' or 'depriciate' in value over a period of time. It never earns "interest on interest" or "return on return". If it earns then investment values can never fall from its previous high.

MF or stock does not have a fixed rate of return, that is why we calculate an average annual return over a period of time assuming annual compounding (known as CAGR). To calculate CAGR we take current value and purchase value and the number of days elapsed in between. This is a backward (not forward) calculation. CAGR completely ignores intermediate volatilities as if MF return always follows a linear trend. No it does not.

It is true that if I invest early in a continuously appreciating asset, then I will have more wealth than one who invests later. But that is not "power of compounding", that is "power of appreciation". In case of SIP also every instalment is actually considered as a separate additional purchase or separate lump sum investment. That is why when you redeem a long running SIP you will find too many redemption entries in transactions list. 

As we often 'assume' correctly that investments in carefully chosen market linked instruments will yield inflation beating return over long term - so we can safely keep on using the phrase "power of compounding" for sake of simplicity. 

To summarize - investment in mutual funds does not 'compound' wealth but 'appreciate' wealth.

About Taxation

About Taxation - 

How returns from various asset classes are taxed :

EQUITY: 

Stocks: 

1. If you hold on to them for a year, the long-term capital gain is tax free

2. Short-term capital gain is taxed at 15%

3. Dividends are tax free

DEBT FIXED INCOME INSTRUMENTS: 

Savings a/c: 

1. Interest up to Rs 10,000 is tax free, taxed at slab rate after that

2. TDS not deducted on savings interest.

Fixed deposits: 

1. Full interest taxed at slab rate

2. TDS of 10% if interest in any financial year crosses Rs 10,000

Recurring deposits :

1. Full interest taxed at slab rate

2. TDS not deducted on RD interest

Tax-free bonds: 

1. Full interest is tax free

2. The long-term capital gain (after holding for 1 year) taxed at 10%

3. Being interest bearing instruments, no indexation benefit allowed

4. Short-term capital gain taxed at marginal rates.

Normal bonds and debentures: 

1. Full interest taxed at slab rate TDS of 10% if interest in any financial year crosses the Rs 5,000 mark

2. The long-term capital gain (after holding for 1 year) taxed at 10%

3. Being interest bearing instruments, no indexation benefit allowed

4. Short-term capital gain taxed at marginal rates.

MUTUAL FUNDS: 

Equity funds :

1. Long-term capital gain (after holding for 1 year) is tax free

2. Short-term capital gain is taxed at 15%

3. Dividends are tax free

Arbitrage funds: 

(Provided they maintain equity fund status)

1. Long-term capital gain (after holding for 1 year) is tax free

2. Short-term capital gain is taxed at 15%

3. Dividends are tax free

Equity oriented balanced funds: 

1. Long-term capital gain will be tax free

2. Short-term capital gain taxed at 15%.

3. Dividends are tax free

Debt funds :

1. Long-term capital gain (after holding for 3 years) is taxed at 20% after indexation

2. Short-term capital gain taxed at marginal rates

3. Dividends are tax-free in the hands of the investor, but scheme pays a very high dividend distribution tax of 28.32%

Debt-oriented balanced funds :

1. Long-term capital gains (after holding for 3 years) taxed at 20% after indexation

2. Short-term capital gain taxed at marginal rates

3. Dividends are tax-free in the hands of investors, but scheme pays a very high dividend distribution tax of 28.32%

Gold funds: 

1. Long-term capital gain (after holding for 3 years) taxed at 20% after indexation

2. Short-term capital gain taxed at marginal rates.

GOLD :

Gold bullion and ornaments :

1. Long-term capital gain (after holding for 3 years) taxed at 20% after indexation

2. Short-term capital gain taxed at marginal rates.

Gold bonds :

1. Small interest received in the middle will be taxed at slab rates

2. Long-term capital gains (after holding for 1 year) taxed at 10%

3. Being interest bearing instruments, no indexation benefit allowed

4. Short-term capital gains taxed at marginal rates.

INSURANCE :

Endowment policies 

1. Final proceeds tax free if premium in any year did not exceed 10% of the sum assured

2. TDS of 2% if the total receipt crosses Rs 1 lakh in financial year

3. Investors should consider service tax paid on premiums also while calculating returns

4. For endowment plans, it is 3.5% for first year's premium and 1.75% for the renewal premium.

Ulips :

For ULIPs, service tax is 14% on all charges (like mortality charges, AMC fees, switch fees, etc)

REAL ESTATE :

1. Rent received (or notional rent for the locked up second home) are taxed at slab rate

2. Deductions available for rent includes property tax, repair costs, home insurance, etc

3. The long-term capital gain (after holding for 3 years) is taxed at 20% after indexation

4. Short-term capital gain is taxed at the marginal rates.

REAL ESTATE INVESTMENT TRUST (REIT) :

1. Long-term capital gain (after holding for 1 year) from REIT units listed and traded in stock exchanges will be tax free 2. Short-term capital gain from REIT units listed and traded in stock exchanges will be taxed at a lower rate of 15%

3. REIT will be pass through vehicle and is not liable for any income received by it

4. Rents received by REIT and distributed will be taxed at the hands of investors as rental income

5. Interest received by REIT and distributed will be taxed at the hands of investors as interest income

6. Dividends received by REIT and distributed will be tax free in the hands of investors.

Securities Transaction Tax (STT): STT is levied on stocks and equity mutual funds in lieu of tax-free dividends and also lower capital gain taxes. Equity mutual funds are defined as schemes that maintain more than 65% equity exposure and because of that, equity oriented balance funds and arbitrage funds also comes under this category.

Dividend distribution tax (DDT): The mutual fund dividends are tax-free, but there is a dividend distribution tax (DDT) applicable for debt mutual funds. The high DDT (works out to be 28.32% now) has taken the sheen out of the dividend options in debt mutual funds.

Indexation benefit: While computing long-term capital gain (LTCG), indexation benefit is provided as compensation against inflation. For example, if the LTCG is 10% p.a. and the inflation is 7% p.a., you need to pay tax only on 3% additional gains. Indexation benefit is not available for instruments that have interest components.

Five mistakes to avoid in financial planning

Wealth creation, not tax

Every year we plan to save our taxes. Investments made under Section 80C of the Income tax Act, 1961 allow a tax deduction up to Rs.1.5 lakh. Several instruments are available under this section such as tax-saving mutual funds, Employees' Provident Fund (EPF), life insurance premium and five-year fixed deposits. But before you choose the tax-saving product, ask yourself: do I really need this product, or am I buying it just to save tax? For instance, you might not need a life insurance policy if you don't have any dependants. A traditional policy like an endowment plan would give returns under 5%. "And if you need one, an online term insurance for protection is good enough," Planners, adding that for most people the EPF and home loan principal amount (if any) would be enough to exhaust section 80C limits. Similarly, just investing once a year mutual fund (MF), that too in a tax-saving scheme, may be inadequate because that would mean you are keen to just saving taxes, and not really in wealth creation.

Jointly, not alone

This is one mistake that most of us commit when we invest in MFs. Make sure you understand the mode of holding whenever you invest. You could either invest in a single name or jointly (i.e., two or three applicants overall). Within joint holding, an MF offers two choices; either 'joint' or 'anyone or survivor'. Under both modes of holding, the money belongs to you, the first investor. Then what difference does it make if you hold your MF units singularly or jointly?

The main problem comes when the first unit holder dies and money needs to transferred (or transmitted, in MF parlance) to the second or remaining unit holders. While the basic set of documents such as a letter from the claimant, death certificate, know-your-client (KYC) details of the claimant, and so on, are necessary irrespective of whether you have a joint (and surviving) holder or not, the legal documents are required if a single holder dies.

If the nominee is registered, an indemnity bond is required if the transmission amount exceeds Rs.1 lakh. If the nominee is not registered and the sole unit holder dies, then your MF will ask all legal heirs to sign an indemnity bond and give individual affidavits.

In joint holding, financial planners suggest 'either or survivor'. "This will provide flexibility in operations and make it easier to dispose proceeds in case of death of one of the holders. In case of a nominee, she has to undergo a process to get the proceeds of the investment transferred in her name. Further, the legal heir(s) may also claim ownership over the investment and turn to litigation," 

Keep long term and short term separate

Your financial goals, the reasons for which you need the money, are scattered across your life. You might need the money tomorrow, in a few weeks, months or a few years. And then there are goals that are way ahead in the future.

In other words, you have short-term as well as long-term goals. And it's necessary to plan for both.

According to some planners, many people tend to invest much of their investable surplus in equities, but forget to plan for contingencies.

"This is a problem as investors who start out (with financial planning and investments), themselves don't know if the equity investments made are for long term or for short term. Youngsters have short-term goals like buying a car or house and to make the down payment, they tend to redeem their equity funds"

"We explained to him that this investment was ideally for long-term needs and that the overall investment strategy was missing allocation towards an emergency fund. The investor realised his mistake and started a systematic investment plan in an arbitrage fund," Make sure that when you invest in equities-especially if starting out afresh-some money is set aside simultaneously in a short-term scheme, preferably through an SIP.  You can also use liquid funds to build a contingency corpus.

Avoid using equity funds for premature withdrawals to meet any emergency requirement.

Limit on utility payments

These days, many of us opt for direct debit facility to make our bill payments, such as for mobile phones, landline telephones, internet charges and others. Instead of submitting cheques or going to the offices of utility providers, we choose the Electronic Clearing Service (ECS) to shift the money out of our bank accounts, every month and automatically, as soon as the utility bill hits the bank account.

Although it's rare for utility providers to overcharge, we have all heard horror stories of someone getting a much bigger bill than usual.

Someone who is used to getting a telephone bill of Rs.600-1,000 may have got a shock seeing a bill of Rs.10,000. This is unusual, but possible.

Unusually high bills may also be because of stolen credit card details. What do you do in such situations? If you think you have been billed wrongly, you will need to complain to your service provider and prove why the usage projected in the bill is not correct.

But there is a precaution that you can take to minimise damage. At the time of applying for the ECS bill payment facility, fix an upper limit for every utility provider. Take a look at your average bill amounts and the highest amount that you have been charged in the past, and fix your upper limit accordingly.

"When you are paying your bills electronically, it's important to keep an eye on the monthly bills as you might just miss larger amounts. When you pay your bills physically, it's much easier to spot a higher-than-usual amount. Hence, fixing an upper limit is important,"

On-time credit payments

Debt per se is not a bad thing but delaying payments can prove to be a heavy mistake, especially on credit cards.

Banks impose a late payment charge, which is usually a fixed fee depending on the slab of outstanding payment that you fall in. Late payment is charged when you don't pay even the minimum amount due. The killer charge, though, is the finance charge that is paid on revolving credit till the time you actually pay your dues. Finance charges are usually 3-3.5% per month, which translates to 20-40% per year, depending upon the card issuing bank. If you are making a delayed credit card payment in cash to a direct sales agent that the bank, sometimes, sends, make sure you take a receipt and preserve it. A little time spent in the beginning to make the right choices can save you from a lot of trouble later. It's just a matter of knowing the right thing to do.

ULIP

What to do if you find that your clients are stuck with life insurance policies that they no longer want to continue or you also feel that they should not continue any further - what are the options then? 

There are options like surrender, paid-up, discontinuance fund etc.

Options will also be different for different types of policies - ULIP, Non-ULIP, Term.

Find below a snapshot of all these -

Q: After one has bought a life insurance policy and if he realise that he does not want to continue with the same then what are the options? 

A: Some time people realise that the policy that they have got in their hand is not what was explained to them or it's not what they have understood and some people who have bought policies about five-ten years ago realise that now they do not want to continue with these policies. 

Let me take it on a case to case basis: 

(1) If a person who has bought a fresh policy and the document has been delivered to him. Every insurance policy has a clause of 15 working day free-look period and within this free-look period he can return the policy back to the insurance company and the insurance company is bound to give the full refund of the premiums that has been paid subject to a couple of deductions like stamp duty that has been paid on the policy, the cost of medical test which the company has incurred and the premium for the number of days he has been provided cover with. In case of a unit linked insurance policies (ULIP) policy the net asset value ( NAV ) as on date of returning the policy is to be paid minus all the expenses. So, this is in case one has bought a fresh policy and the document has just landed in his hand. 

(2) If one has a traditional policy bought prior 1st January 2014. In traditional policies, one has to pay premium for at least three years. If one haven’t paid premiums for three years, all the money that has been paid gets forfeited and nothing comes at a time of closing the policy. In case premiums have been paid for more than three years then there are two options available; 

(a) stop paying any further premium to the policy. The benefits that have been accrued in the policy gets freezed as on that date and the payout happens when the original maturity was scheduled to be, for example he had a policy for 20 years, paid premiums for five years and then stopped making any premium payments but all the benefits accrued from five years will be kept as it is and given at the end of 20 years. 

(b) In case he does not want to wait for that number of years then there is an option to surrender policy back to the company and the company after deducting certain charges, which are pretty heavy in nature in terms of charges, however he gets the money in hand immediately.

IMP: For traditional policy bought after 1st January 2014: If the premium paying term for policy is less than 10 yrs. Then the policy will acquire the surrender value after paying premium for 2 yrs (earliar it was 3 yrs), however if the premium paying tenure is more than 10 yrs , then the surrender value will be acquired only after paying 3 yrs premium.

(3) Talking about united linked insurance policies. If a person has bought a policy before September 1, 2010 then he can go back to the insurance company, ask for surrendering the policy and the company based on the current NAV minus the surrender charges will refund the money straight in hand. In case if the policy has been bought after September 1, 2010 then there a minimum locking period of five years. So, one can stop making the premium payment and even if he has made just one premium payment then he does not have to make a payment for five years. The money gets transferred into the policy discontinuation fund and the insurance company is entitled to deduct maximum of Rs 6,000 from that fund. The balance amount will remain in the policy discontinuation fund and be given at the end of five years, which is a minimum lock-in period. In the interim period one gets an interest at the rate of what the savings bank account holder of a State Bank of India  gets, which his currently 4 percent.

(4) In a pure term policy there are no benefits to be paid out at the end of the period. So, let us assume a person has taken a term policy and after five years he is getting another option, which is cheaper and possibly he doesn't want to continue with the company which he already has a term cover with, he simply stops making the payment. The policy terminates because the benefits that accrue in the pure term policy are only for one year. So, if one pays the premium, he is covered. If one does not pay the premium the policy terminates on its own.

Provident Fund

Any salaried person who is having a PF a/c should obtain for Universal Account Number (UAN).

Why?

1) UAN remains same throughout the lifetime of an employee. 

2) PF transfer process would be very easy as all PF a/c of different jobs would be linked to the UAN.

3) You can check balance and download the updated EPF passbook anytime.

How?

Step 1:

Visit uanmembers.epfoservices.in Click on "Know your UAN status"

 Step 2:

Fill the PF a/c number details in the given columns. After filling the PF number details click "Check Status"

Step 3:

Give your personal details - name, DoB, mobile number etc. Click on "Get PIN" then.

Step 4:

You will receive the PIN through SMS. Enter that PIN now, click on the checkbox 'I agree' and then click the "Submit" button.

Step 5:

You can see your UAN number on screen as well through an SMS received. Visit uanmembers.epfoservices.in and login giving your user id  (UAN number) and your chosen password.

Loan Or Investment? What to do first?

Making investment to achieve financial goals can wait... I will better pay off my loan first!

So you are going pay off your 15 year loan in next 7 years. Fine. But make sure that you are not going to be "ASSET RICH, BUT CASH POOR" when you will need cash most. Let me explain. 

Say, after 7 years or within anytime next 10 years you also have a goal to achieve. At that time when you will need liquid money to spend, you may find yourself in an "ASSET RICH, BUT CASH POOR" situation i.e. though you will have a loan-free asset then (which you can't liquidate or sell in parts) but not enough cash to spend.

At any point in life you should never be in an "ASSET RICH, BUT CASH POOR" situation.

NPS

1) Myth: NPS starts with the word 'National' that means govt. will manage this.

Reality: NPS fund is managed by 7-8 private fund management teams. No hands of govt. here.

2) Myth: NPS is a retirement scheme hence value of my investment will move upwards only just like PPF.

Reality: NPS fund value moves upwards and downwards as market  moves. NPS also has its own NAV history just like any other mutual fund.

3) Myth: NPS gives me huge tax benefits under various sections.

Reality: Tax benefits under NPS is actually "tax deferment" - as I have finally to pay tax on maturity anyway,  on my capital as well as on my gain.

CAGR, XIRR, Rolling Return...

The above 3 terms we see often when we look for return history of a fund. How these measures differ from each other and at what context they are to be used? (We will not discuss any formula here, just plain understanding of the terms)

Say 5 years back two funds' NFOs got opened - fund A and fund B - at NAV 10. Now after 5 years say both funds' NAV stands at 20. What is compounded annualised return (CAGR) here?

Simple. Use 'rate' function in Excel. Remember CAGR is not per year return or not average return. It is compounded annualised growth rate. So CAGR is not going to be 20% but somewhere near 15%. So both funds' CAGR will be same. Fine.

Now there could be two different scenarios -

1) Say, fund A's NAV stayed most of the time close to 10 - 12 and sometime even below 10 and then suddenly in last 1 quarter it's NAV suddenly spiked up and reached 15. Whereas fund B's NAV grew at a regular fashion throughout this 5 years. Though both fund's CAGR shows here the same number but which one is a better performer? Ofcourse Fund B!

Rolling Return will help us here to find out which fund is a more consistent performer. 

2) If there are intermediate transactions in between this 5 years, CAGR will not reflect those. What could be intermediate transactions? Those could be dividend payouts, partial withdrawals or additional investments etc. 

XIRR will consider such transactions and shows us the right figure to compare both funds' performances in such cases.

NPS Money At Maturity.

Santa: Tax, no tax, partial tax... koi mujhe batayega... what will happen to my NPS money at maturity?

Banta: Say, on maturity total money in your NPS a/c is Rs.100.

Santa: Ok.

Banta: Now straightaway you have to buy annuity papers from some or other insurance companies of Rs. 40. No escape from this. And remember the pension or annuity income that you will receive from these papers will be fully taxable.

Santa: Ok (100 - 40) = 60

So I am now left with Rs. 60.

Banta: Yes. Now pay tax on Rs. 20. Say, you are in tax bracket of 30%. So pay tax of Rs. 6 (30% of 20). 

Santa: (60 - 6) = 54, so finally I will be left with Rs. 54 in my hand at maturity, which I can spend at my wish, right?

Banta: Right! Remember this magic number 0.54 then.

Santa: Ek example do.

Banta: Jaise ki socho you have accumulated total Rs. 75 lakhs in your NPS a/c. So after buying annuity and paying tax, how much money you will be left with?

Santa: Kitna?

Banta: Simple... 75 × 0.54 = 40.5 lakhs!

Santa: Ok, so...

NPS money at maturity × 0.54 = Money in hand

Santa: Yes!

Where does this road lead to?

“Where does this road lead to?” I was surprised that two people asked me the same question on a single day. I had gone for a morning walk and within just 10 minutes, two persons asked me this.

My answer to both was, “Where do you want to go?” The moment they told me the destination, it was easy for me to guide them which way to go. They both knew their destination and still asked a wrong question. Had I tried to answer the question without probing, I could have told them anything. The chances are high that my answer would not have been of any help to either.

While reaching the destination is more important, we keep focusing on speed in a journey. As we all know that in a journey, direction is more important than speed. If the speed is slow, but the direction right, you would reach the destination late, but if the speed is high and direction wrong, you may reach somewhere else. We all know this simple fact. Still, the discussions about investments focus too much on speed – the rate of return and not the financial goal, which is the determinant of the direction.

Identify your financial goals and then plan to achieve those. Which scheme should be a part of the plan is a secondary question.

Money Position

On a scale from one to ten, exactly how happy are you with your money situation right now?

Grading criteria could be as follows:

0 - 2

If you are maintaining sufficient amount of emergency or contingency fund or if you are not at all dependent on your credit card.

3 - 4

If you have taken good amount of health cover by yourself (excluding employer provided cover) and adequate amount of life cover.

5 - 6

If you are not paying EMI which is more than 20% of your salary.

7 - 8

If you are investing regularly AS MUCH AS YOU CAN. And if you are also maintaining a decent 'asset allocation' keeping in mind your goals and risk appetite.

9 - 10

If you have a detailed financial plan ready and (most importantly) following it religiously and getting it reviewed regularly by your planner.

How to create a financial plan for a family which has a special child?

(1) Special contingency planning (this is over and above the regular contingency plan):

Contingency goal for a special child should include the following: 

Funds needed for meeting the expense of yearly therapies and funds needed for meeting the yearly school fees etc.

(2) Retirement Plan: 

Client should plan for their own retirement years like any other client. But while doing so they should quote separately their (a) current monthly household & lifestyle expenses and (b) current monthly expenses towards special child's therapy, school fees and other related expenses. 

Why to quote these expenses seperately? Because both these expense heads may have seperate inflation rate to be assumed for.

(3) Create a Private Trust: 

This is because when the beneficiary (in this case a special child) is not capable of managing the assets by himself or herself, then you need to create a Private Trust and appoint trustees who will manage the assets on behalf of the child (beneficiary).

The objective behind creating the trust - i.e. what is to be done with the assets which are transferred to the trust - should be very clearly mentioned in the trust deed and get that deed registered. If you want you can also appoint some professionals as trustee who have the expertise and experience of managing finance for special children. Make sure that your life insurance proceeds also go to the trust directly and not to the beneficiary.

What is to be done after your death with your other assets (which are not yet transferred to the trust as those are meant for your current or future use)? 

Create a Will and ensure that such assets will also go to the trust after your death and not directly passed on to the child. 

In Will you can also specify a "guardian" who will take care of your child in your absense. A guardian is supposed to take care of your child's day to day needs while a trustee is supposed to manage the finance for your child. Both trustee and guardian can be the same person or different persons.

(4) Make use of tax deductions:

There are certain tax related benefits for families who have special child as dependents. Check deduction U/S 80DD for medical treatment of disabled dependent (up to 1.25 lakh is allowed for severe disabilities and 75 k for non-severe disabilities.)

(5) Frequent reviews:

As this is not a regular financial plan frequent reviews (preferably a review every quarter) is recommended. Why? Because short term goals are very important here and are also subject to change any time.

Professor who can pocket Rs 450 cores.

He is rich and about to become richer, if not the richest “middle-class” professor.

On Friday, when Diageo — the world’s largest spirit manufacturer — makes an open offer to acquire an additional 26 per cent of Vijay Mallya’s United Spirits Limited (USL), a little-known professor in a Mumbai college will get Rs 450 crore if he chooses to sell.Reticent and media shy, Shivanand Mankekar, who leads a middle-class and largely anonymous life in the crummy by-lanes of Mumbai’s oldest residential area, Matunga, is the largest retail investor of USL.He is the owner of 1.02 per cent of the company, holding 14.89 lakh shares.

USL, owned by Royal Challengers Bangalore team boss Mallya, manufactures the McDowell’s No. 1 brand of spirits and bottled water. But beleaguered as he is by massive debts, Mallya is selling USL and Diageo, of the UK, is making a $1.9-billion bid to take the company over.

The open offer, Diageo’s second, pegs the per share price of USL at Rs 3,030.Diageo had earlier come out with an open offer for USL in May 2013 at a price of Rs 1,440 per share. But that offer failed.

Diageo owns 29 per cent of USL. With another 26 per cent of USL shares, it would take its total stake to 55 per cent, reducing Mallya to a minority shareholder but making Mankekar very rich.

Those who have known Mankekar, 62, for years say big gains like the one on his USL shares are not new for the management professor. Mankekar had made a killing and a name on the stock markets in 2002 when he made Rs 100 crore from Pantaloon shares worth Rs 1 crore.

“Over the years he has made big gains, which have hitched up his net worth, but his lifestyle remains the same. He lives in a 1,200sqft, three-bedroom apartment with his wife, son and daughter-in-law, and drives a Santro,” said a Bombay Stock Exchange trader who has known Mankekar for a long time.

Not many outside the Indian capital markets know of Mankekar, the only academic among the top 12 private investors in India.

He taught billionaire banker Uday Kotak at the Jamnalal Bajaj Institute of Management where he still works. Kotak, too, still considers him his “guru”, says a top official of Kotak Mahindra Bank where Kotak is a 50 per cent owner.

For years, he stayed in a 700sqft apartment in a co-operative housing society in Mahim’s crowded Mogul Lane. Two years back, after his son Kedar’s marriage, he moved with his family to a bigger apartment on Sakharam Keer Road, better known in Mumbai as Skeer Road.

Mankekar, though, is no skeer.

The Urban Dictionary might want to reinvent the meaning of “skeer”, which means “being broke”.Dalal Street insiders peg Mankekar’s current worth, along with that of his wife Laxmi and son Kedar, at over Rs 1,000 crore post the Diageo open offer.Till last month, when his name was splashed in the media after Diageo made the second open offer that will open on Friday, Mankekar’s neighbours at Matoshree Pearl — the Skeer Road multi-rise where he now lives — had no inkling of his worth.

“All we knew is that Mankekar teaches financial management and is a Sai Baba devotee. He is social and affable. His son owns a firm called Om Kedar Securities and also teaches management at Matunga’s Wellingkar institute,” says a neighbour.A corporate honcho, who was the professor’s batchmate at the Jamnalal Bajaj Institute from where both passed out in 1975, describes Mankekar as “reticent and shy, not the brightest of the class”.

“He dropped out of our radar after college. Next I know, he is a hot-shot investor,” he says.The Dalal street trader who has worked with Mankekar for a long time says that apart from teaching, the professor also ran a coaching academy and teacher training workshops. “He started off with small investments and gradually worked his way up after big gains he made with Pantaloons. It built his confidence.”

So much so that when the markets crashed wildly in May-June 2006, Mankekar was among the few investors who did not panic and held on to their stocks.“He has made his money from abrupt big hits. It has not always worked. He suffered heavily when the Wockhardt shares slumped. But, as a rule, whenever a stock starts performing well, he starts buying. That is his style,” says Calcutta-based investment strategist Basant Maheshwari, who has followed Mankekar’s market footprint over the years.Market regulars on Dalal Street say his knowledge base as a management professor makes him a savvy investor.

If Mankekar is India’s John Maynard Keynes, the legendary British economist who made substantial gains from his Wall Street investment, he is yet to propound his philosophy. But simple living and high earnings on the bourses is clearly his chosen path.

“I am a middle-class man and I am comfortable in my ordinary life. I do not like to interact with the media,” Mankekar told The Telegraph on Wednesday before quietly putting the phone down.

Mankekar is no Rakesh Jhunjhunwala, India’s celebrity professional investor and cult-hero in the mould of Warren Buffet.

Neither like investor Nimesh Shah — founder of Enam Securities — is he a Charles Munger-like recluse.

“He is below the public radar, almost the Everyman on Dalal Street. It is only his ability to pick the right stocks and stay on with them through thick and thin that has turned his day job as an academic into a hobby and a passing fancy with stocks into a full-fledged business,” says the CEO of a Mumbai-based stock-broking firm who works closely with Kedar’s company.

“The investments of the Mankekar family are in the name of Mankekar, his wife Laxmi and his son Kedar. Some investments are made in the name of Om Kedar Investments.”A staffer at Om Kedar says the Mankekars believe in a concentrated portfolio with only a few high-performance stocks. “They don’t look for low-priced stocks. Only dazzling performers matter and we go the extra mile in terms of paying big prices for them,” she says. “We follow a stock’s performance, then hone in on it and pay up whatever the price. From time to time, we bin the laggards in our portfolio.”

This ability to hold on to his nerve when the markets had crashed in a free-fall in 2006 is what got Mankekar noticed as an investor to watch out for.

On Friday, as Diageo hits the markets with its offer of Rs 3,030 for a stock Mankekar had picked up for about Rs 900 a few years back, many will be watching to see if the professor makes a killing. Or whether he holds out in search of a bigger bargain.

Indias Fastest Growing Economy

India has overtaken China as the fastest growing global economy – and according to Paul Sheard, chief economist at S&P Global India could grow up to 8% annually for the next 30 years. Speaking at the sixth annual Financial Leaders’ Forum in Saudi Arabia last week, Sheard was reported to back India’s long term growth potential, thanks in the most part to its favourable demographics. Being one of the world’s largest importers of oil, India has a net beneficiary of a falling oil price over the past two years, boosting public finances and bringing down living costs in the country. While the IMF forecasts India's GDP to grow at 7.5% over the next two years, New Delhi's Central Statistics Office expects the country's GDP to climb to 7.6% in 2016, which is an increase of 0.4% than what it achieved in 2014. Unlike most of its emerging market peers such as Brazil and Russia that are heavily relying on commodity-related exports, India economy is fundamentally driven by emerging middle class consumers in the country. Political stability is also one of the contributors, thanks to Prime Minister Narendra Modi’s efforts to boost foreign investment and infrastructure. In Mumbai, at the Make in India Week exposition, attended by more than 10,000 government and business delegations from 72 countries, $220 billion of investment was committed, creating jobs and boosting manufacturing, according to Kunal Desai, manager of the Neptune India Fund. “Whilst it is debatable how much investment will materialise, we believe it goes some way to show the intent of policymakers – other emerging markets are not approaching foreign companies with this scale and coordination,” says Desai. Desai believes that the most interesting investments in the Indian market exist among mid-cap stocks, where he believes companies to “be far more nimble than their baggage-burdened large-cap peers”.

Which Emerging Market Funds Offer the Greatest India Exposure? 

Stewart Investors Global Emerging Markets has 20.6% of exposures to India equities, and the Silver Rated fund has generated 8.1% year to date. The fund has a 3.7% five years annualised return and a 10 -year annualised return of 9.8%. Morningstar analyst Simon Dorricott thinks that the fund remains an impressive offering. First State Stewart has been particularly successful at investing in the emerging markets of India and the stock selection skills was a largest positive, Dorricott adds. The fund charges an annual fee of 1.9%. JP Morgan Emerging Markets, a Bronze Rated fund holding 23% in India equities has gained 6.5% year to date. Although the approach of co-managers of the fund, Austin Forey and Leon Eidelman, may result in the fund underperforming for short periods if markets are driven by commodities, lower-quality names, or macro and political issues, it has generally not shown significant weakness over more meaningful periods, Dorricott said. The fund’s ongoing charge is 1.68% which is competitive compared with the median retail share class within the Global Emerging Markets Equity Morningstar Category.