Mumbai: Many of you have done well in life and wish to pass part of that on to your children. Most people struggle with a shirt or a pant going up to a diamond set, a car or even better a house. That is not the point – what you give should be financially a great investment over a long period of time. Long after the wrappers have been thrown out, and the puppy has grown up, is there a gift that will stay with them?
Yes, give them financial freedomTo me, the key is to teach them that instant gratification is good, but teaching them that money should be got (earned is best), spent (some instant gratification) and saved for the future. So if your child or grandchild is about to have a birthday, break the gift into various parts. Let him / her decide what to do with the three parts. Let one portion be for instant gratification (mobile, ipod, VCD, jeans) put away a portion for buying something he / she needs in say five years time (education) and one portion that he / she will use when they are say 50 years of age.
This will teach them that instant gratification is great but if you look around the attic, it is not very inspiring. It will also teach them about ‘value’ and help them take a decision on the basis of value rather than impulse.
Let us say you wish to gift Rs 5,00,000 to your grand daughter who is all of 12 years of age. Fairly obvious that she will not be able to appreciate what this article says. However, she will understand that our politicians have made it almost mandatory for kids from middle class families also to study abroad. She will understand that her father will have a conflict of interest when allocating money for her education and for his retirement.
An investment requires patience, the ability to delay gratification, and a little bit of know-how. As a grandparent, you can help set lifelong patterns of financial responsibility by showing your grandchildren how to invest their money wisely.
Now sit with your grand daughter and teach her why she should delay gratification. Tell her how her money will grow in a mutual fund. How she should buy a VCD for Rs 5000, and put the balance in a mutual fund. Teach her that she could be a lender to a company by buying debentures or a part owner by buying equity shares. Even better she could get excellent fund managers work for her by paying them a fee. Introduce her to the big great world of finance and investments.
How when at 21 years she pays her college fees from the fund, her eyes will be moist. How at 32 when her husband is buying a house this fund will help bridge the gap. How when at 40 she decides to start a new business, this fund will give her the confidence to do something on her own.
Even Rs 1, 000 can buy a well-rounded mutual fund. If you had invested in an SIP of Rs 1000 in one of India's leading fund schemes since the year 1997, you would have invested Rs 1,12,000 today. And that would have been worth Rs 8,00,614. Giving an annualized return of 40 per cent. Agreed that your financial planner is telling you that past performance is not a guarantee of future performance.
Is he guaranteeing that it will not give 40 per cent over the next 20 years? No. The past is only a proxy for what can happen in the future. But surely you can afford a Rs 5,000 SIP for your grand daughter? What about Rs 10,000? I surely do not know how much return to expect but a 15 per cent return over the next 30 years cannot be a small amount. Do you agree?
What will it do? It will pay for her education, home down payment, her business and perhaps if she did not use it for any of these, her retirement.
You could perhaps help older children with more advanced concepts like index funds, like saying it is better to receive interest rather than pay interest. On why they can save for an asset rather than pay an EMI (equated monthly installment). Or how a loan for a smaller time frame is cheaper than a loan for a longer time frame.
Help your children to see how much fun it is to watch an investment grow. Celebrate milestones – like when that investment doubles or reaches the target goal for something special. Drop in a small amount every time there is a celebration. When she gets a Rs 25,000 gift from her uncle, tell her how she can invest a portion of that in the same mutual fund.
Finance is changing and changing dramatically. For sheer survival you need to learn and adapt. If you spent time with your child or grandchild teaching her finance, the satisfaction is two fold.
She will think of you whenever she looks at her degree, house, car or retirement plan. Less selfishly you would have spent time with her, and taught her things, which corporate India believes that the kids who join them should know.
The author, PV Subramanyam, is a financial domain trainer.
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