How your Mutual Funds investment affects your Family

When it comes to Mutual Funds Investment, it is often seen that investors discuss the same with their friends, colleagues or random strangers on some web forum but very rarely do investors discuss their investments with their family members or for that matter, even inform them of their investments.

The following write up will discuss how your Mutual Fund investment decisions affect your family members.

Children’s Education Plan

Ah Childhood ! A carefree zone one if not all then most would love to go back to for worries were few and joys many. Children can be an erratic lot, from wanting to be a doctor one day to a lawyer another. 

Their dreams vary and can be erratic, the pertinent question that needs to be addressed though is can you afford to be erratic with their dreams and future?

Parents often assume that when the time arrives, they would have the sufficient corpus necessary to fund their child’s education but in the process tend not to account for the following factors:

> Inflation.

> In cases of higher education abroad then exchange rate fluctuations, accommodation and travel fare.

> Whether the parents have accounted for a retirement corpus.

From 2008 to 2018, education fees have risen by
150 % for school and tuition
175 % for private schools
96 % for technical courses

Source: The Value of Education Learning of Life published in 2015 by HSBC Holdings

Now let’s imagine that a parent on the basis of fees in 2008, decided that he/she currently had 15 lakhs needed for his/her child’s higher education needed in 2018, it’s clear inflation would have caused an increase in fees thereby creating a need to look elsewhere for the difference caused by inflation.

The price you pay for not planning

In case you failed to plan on how you would go about accumulating the necessary funds for your child’s higher education, the price you pay for the same is heavy.

You would most likely end up taking an education loan; the same would be borne by either you or your child.

How not planning affects you?

If you decide the repay the loan then chances are you would end up working harder and longer since it becomes an additional expense to the already ongoing fixed monthly expenses. This would take a toll on your health as well as take away your leisure time. Keep in mind that this time you would most likely be in your late 40’s or early 50’s.

This additional expense would then leave little to no room for adding to your retirement corpus. In an ideal scenario, you should have already had retirement corpus in your 30’s with a long term (20-25 years) SIP. So when you decide to repay the loan you would have to either stop adding to your retirement corpus or reduce the monthly investment or in a worst case scenario, cease it altogether.

There have also been cases where the couple has had to dig into their emergency funds which indeed is a far from ideal scenario.

How not planning affects your child?

> Beginning your work life with a heavy debt on your shoulders is never an ideal scenario. When you are young and have fewer responsibilities, your risk appetite is generally on the higher side. 

> As time passes, your responsibilities increases but your risk appetite decreases.

> Responsibilities and risk appetite are inversely related, as the former increases the latter declines.

> Because of poor planning, your child ends up paying off the education loan in his/her formative years in the workforce. This is a very big opportunity missed and one that is rarely spoken about.

> In case he/she did not have to pay off the education loan, he/she could have used the same amount or at least a good portion towards Mutual Funds investment. This would have given him/her ample time to reach goals with a smaller amount since the earlier you start the lesser the amount.

> If your child fails to repay on time and defaults on a couple of payments then that will affect his/her credit score too.

Let’s say your child is paying off INR Rs 20000 each month for the next 5 years in order to repay the loan.

If the same INR Rs 20000 was instead invested in a Mutual Fund SIP for the same number of years, he/she would be in the following position

Monthly SIP
No of years
Expected CAGR
Invested Amount
12 Lakhs
Expected Future Value
16.5 Lakhs

So as you can see because of poor planning on your part, your child begins his formative earning years on the wrong foot.

> It is very convenient to assume that your child can always make up for the notional loss of 16.5 Lakhs in the near future but you cannot make up for lost time. You can still make up the 16.5 Lakhs, that’s not the point. 

The point is with time passing by, responsibilities also add up.

> So what your child could have started by say when he was 25 years, he will not start when he is around 30 years and that’s also the age around which most people tend to get married, get their own place and some even have kids of their own. 

> These responsibilities by default then decrease your risk appetite to invest since other expenses which did not exist earlier now command your attention.

> You could always argue that your child by 30 will also be further ahead in his professional life so that gives him a higher amount than INR Rs 20000 to do a Monthly SIP and that is indeed a fair point but you not as easy you think.

> You see when you are around 30, your responsibilities tend to add up as we have discussed above. These responsibilities tend to lower your risk tolerance since you are no more your first priority. Your priorities would now include your partner, your marital life, kids if any and so on. 

> These never existed when you were 25, you could always argue that you do not want these things too and this is indeed a valid point.

> Retirement is not a choice, it’s mandatory. It is not going to ask for your permission, also your child would no longer be dependent on you, in fact you would now be expected to take care of them. 

                All these are expenses that never existed when he was 25 which would have given him a high risk appetite and risk tolerance.

How you should have planned your investments?

You should have ideally started you SIP as early as possible, this has dual benefits in a longer time horizon and thereby a smaller amount.

For example consider the following scenario
Monthly SIP
No of years
Expected CAGR
Invested Amount
6 lakhs
Expected Future Value
11.6 lakhs

> A meagre monthly contribution of 5k towards your child’s education would translate to 11.6 lakhs if the above conditions are also satisfied.

> Keep in mind though that we have on purpose kept the expected CAGR on the lower side since it is advisable to err on the side of caution.

> You need not even begin with 5k, you can begin with say 2k and gradually move towards a disciplined 5k. In either case, you can gradually increase the monthly contribution annually with a rise in your income too.

> Another point worth considering is, in case you have the luxury of work bonus or say happened to receive a large sum on the fruition of some old plan like say post office scheme, you can add that too availing the Systematic Withdrawal Plan (SWP).

In case you were wise enough to follow the above mentioned process then this would avoid the ill effects in future life of both you as well as the child.

This would allow your child to begin his work life with a clean slate avoiding debt and permit you to move towards retirement on a much peaceful path.

You cannot argue that 10 years is a really long time to stay invested when the goal itself is 10 years away. 

Your job is to control what you can and ignore what you cannot.

Things that can be controlled
Things that cannot be controlled
Your behaviour
Market behavior
Your greed & discipline
Market volatility

Read that again

> Imagine your portfolio like your child, it will only mature with time and not when you want it to.

> You can try covering up your lack of planning by taking out a loan for your child’s education but keep in mind that there is no such thing as a retirement loan

We have seen above how lack of planning on your part can affect you, you child and your family as a whole.

Did you fill out the Nominee option?

> We are sure you must have been asked to fill out who you would like to nominate the last time you made a Mutual Fund Investment.

> A common misconception with this is that in case of an adverse event, your nominee would then be the legal heir to your investments, this is completely untrue.

> A nominee is someone who has the right to receive but a legal heir is someone who has the right to own

As you can see they do no mean the same thing.

> Let’s assume you have a child who is doing well financially, you therefore feel it would be prudent to nominate your wife with all your investments.

> In case something were to happen, your wife will not be the only one with claims to your investments because your child can also be one of the claimants.

> Of course if you wish your wife to claim all your investments and not your child, you can write a will to the effect.

In case of no will, the various succession laws will come into practice accordingly.

Death is certain but the timing of it is not so the next time you fill out that nomination option with your mutual fund investment, make sure to think twice.

Large number of Mutual Fund Schemes

> With the ‘’ Mutual Funds Sahi Hai’’ campaign spreading the word on Mutual Funds successfully to every nook and corner of the country, there has been a steady rise in the inflows into Mutual Funds.

> This unfortunately though is spreading more information than knowledge, even though that was never the intended objective.

> Information or rather misinformation is enticing the novice investor to look up schemes with ‘’high returns’’ and 5 star ratings on certain websites. The issue with these ratings is that they tend to change quarterly or monthly based on recent performances.

> These changes then entice the investor in the new 5 star rated scheme since he/she has the fear of missing out. At this moment he/she does not abandon the old mutual fund schemes for the fear of exit load.

Fear should never be a determinant for Investing, goals should be.

> Experts on business news channels tend to speak on new schemes or stocks every day and the reason for the same is for the audience to stay interested.

Would you keep on watching the same news channels if the news were always the same?

> Some investors inadvertently end up with more folios with the same scheme, this is because they made a lump sum as well as a SIP investment not knowing it is possible to have them both in the same folio.

If something were to happen to you, will your nominee be able to track all these when you yourself as the primary investor could not?

If you have never discussed about your Mutual Fund Investments with your family or at least informed them of the same then how do you expect them to redeem the same?

What happens in case your family cannot claim your Mutual Fund Investments?

Consider the following scenarios
    > You made a lump sum investment via Bank A but have now closed the said bank account. Now when the time comes to redeem you cannot do so since you had given Bank A as the bank for redemption.

    > You get married and decide to change your surname. When the time comes to redeeming your investments, the AMC can reject the claim citing change in name.  

Both the above scenarios are not a dead end and can be rectified.

In scenario A you would need to give an undertaking asking for change in bank whereas in scenario b you can get it rectified by forwarding a photocopy of your marriage certificate.

The harsh reality is, the Indian service sector is not exactly known for its after sales and Mutual Fund AMC’s are not that different. 

This mind you is not a generalized statement but something prevailing quite rampantly.

The odds are already stacked against you, now imagine making your family going through the same hassle.

As on August 2018, INR Rs 44,000 crore of investors hard earned money in Mutual Fund investments remains unclaimed. No one particular Mutual Fund scheme comes even close to that amount so you can understand the magnitude of that figure.
We have mentioned several examples above as to why they could go unclaimed, some others are:
    > Not updating change in address
    > In case the cheque has not been encashed in the stipulated time period

The scary part about this unclaimed money is that many investors are not even aware that either investments are done in their name or they are the nominee or legal heir of the same.

Imagine the numerous possibilities this unclaimed money could open doors to. From being able to pay off debts to spending on someone’s higher education to wedding expenses. 

The reason for these examples is that there is a very high possibility that most if not all of this money is retail owned and not institutional since with institutions there is constant scrutiny of books.

Even if you are lucky to realize you are the legal heir to these investments and can verify the same,there is still no certainty that you will get that amount because:

‘’According to the said rules, if the investments are not claimed within a period of 7 years then the same is transferred to the Investors Education and Protection Fund.’’

So as you can see the claimant has to come forward and verify his claim within the said period, if not the same cannot be claimed ever.

What is the Investor’s Education and Protection Fund?

This Fund as the name suggests is used to spread financial awareness

So the next you see the following billboard on highways, bus stops, or railway stations along with the front page of your newspaper, you know where the money for the same has been paid for.

Image credit:Bloomberg Quint

This is in no way to mean that money is not repaid on purpose by AMC’s.

To the contrary it is to highlight the magnitude of unclaimed money that allows for such expensive advertisements.

If you can discuss your Mutual Fund Investments with your colleague, friend or some random stranger or a website forum then please do discuss, if not then at least inform your family members of the same along with the procedure for redemption for not doing so can cost your dearly as explained above.

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Disclaimer : While due precaution has been undertaken in the preparation of this article, The Mutual Fund Guide or any of its authors will not be held liable for any investments based on the above article. The above article should not be considered financial advice and has been published only for your perusal. Due credit has been given in case wherever required, in case you feel any part violates any rights then do get in touch with us and we shall get it duly removed.  
Mutual Fund investments are subject to market risks. Please read the offer document carefully before investing

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