HER financial plan

With Women’s Day round the corner, a look at what she must do at different stages of her life to be in command of her hard-earned money

After studying hard, preparing for and attending interviews, you finally achieve the end purpose of all those years of hard work — a lucrative job. Reason enough to celebrate? Yes of course. But blow up all the salary? Many like to splurge like there is no tomorrow. It would be wise to enjoy some well-earned rewards on things you have uses for.

However, in your desire to indulge, don’t lose sight of your finances; balance your investments prudently. Follow a suitable asset allocation policy with investments in equity, debt, gold and real estate depending on your risk appetite and age. Here is what you, as an empowered woman, must do at different stages of your life so that you stay in command of your hard-earned money and make it work for you.

Insure your risks

After you receive your salary for the first few months, don’t rush to invest massive amounts or spend everything. This will create liquidity problems for you at the end of the month.

Draw a budget of your expenses. Include student loan EMI, if any, rent, household expenditure, amounts sent to parents and transportation costs. To the extent possible, keep a check on the number of times you eat out, expensive excursions with colleagues or costly movie tickets during weekends. For the first few months, observe how your monthly expenditure pans out before taking concrete financial decisions. For starters, try to save at least 5-10 per cent of your salary. Before starting any investment, take a term cover — more so, if you have dependent parents. You must take a term policy for at least 10 times your annual salary, and step it up as you age, marry, have children, change jobs for higher salaries, and so on. The next step is to take a health insurance policy. If your company offers you a group cover, where you are allowed to add your parents as well, do so. Group insurance policies are cheaper than regular ones and coverage would start immediately after premium payment. If possible, take a medical policy separately from an insurer, so that even when you switch jobs, you have a cover to fall back on.

Start investing early

When your monthly budget stabilises, you can consider investments. Typically, investments are made for achieving specific goals — marriage, buying vehicles, overseas vacation, retirement, and so on.

 

 

How and where you invest would depend on your risk-appetite and time horizon for a goal. If you are averse to market volatility, you can start investing in recurring deposits, public provident fund or increase your voluntary PF contribution (VPF).

But if you can take risks, especially if parents aren’t dependent on your income, you can consider mutual funds. Starters can go for balanced funds (which invest in debt and equity) and large-cap schemes (that invest in large, well-known companies).

While investing in equity funds, set aside sums that you would not need for the next three to five years at least. This is to ensure that the amounts stay invested and earn above-average returns. Resist the temptation of dipping into these investments for your monthly requirements. Tax benefits are important. But do not let these benefits alone dictate your investment choices. Do not fall for the temptation of buying traditional insurance policies. For one, the returns from endowment policies are low. Also, the life cover is low and the cost structure high. Do not confuse insurance with investments.

Minimising credit

You can opt for a credit card; of course, if you can get by with your debit card alone, then nothing like it.

Having a credit card allows you to have more liquidity and gives you leeway to spend during emergencies. But ensure that you do not spend more than 40-50 per cent of the credit limit available. Adhere to this rule religiously, and assume that you have only half the sanctioned level available for use.

Pay the full amount and not the minimum sum. Else, you will end up paying high interest rates on your outstanding amount. Keep automated reminders on your phone so that you do not miss the date for paying your card dues. Avoid rushing to buy a house or property early on or even an expensive four-wheeler with loans. Build a contingency fund equal to six months’ expenses. You can start saving for this fund a year or so after you start on your job.

Post-marriage planning

As the years go by, you may choose to marry and have children. Under the changed circumstances, you may have to rework and move to the next stage of financial planning.

An important aspect to note is that you must discuss household finances with your husband early on in your married life, and understand each other’s spending and saving habit. As with all aspects of life, financial compatibility with your husband is also important.

Keep your investments separate from your husband’s as your risk profiles may differ. Besides, you would not want to expose the entire corpus to risks (markets, concentration). Have individual accounts for respective investments and a joint account for household expenses and payment of EMIs. In case you need to support your parents financially, discuss the implications with your husband and work out goals and time-lines accordingly as the total investment would be lower. If your husband too needs to support his parents, then strict curbs on spending and usage of credit cards are required, as investments need to be channelised for joint and individual goals.

If you intend buying a house, do so only if you would occupy it as a family. Take a joint loan with your husband as both would enjoy tax benefits on principal and interest repayments. Then, if and when you plan to have children, plan for your maternity leave. Keep some extra cushion in the form of increased savings/emergency funds as you may face a situation wherein you would need to extend your maternity leave and go without pay. If you have a girl child, consider the Sukanya Samriddhi Yojana and mutual funds that allow you to invest on behalf of children (typically called children’s benefit or gift plan).

Remember, the moment you get a hike in your salary, you must step up investments proportionately. Finally, add your child too to your medical policy or your husband’s. You can also consider adding your child’s name to your company’s group insurance policy.

Cover for her

Given the highly-stressed lifestyle of a woman today — irrespective of whether she is a home-maker or working — a health insurance cover is mandatory. This is more so,with instances of hypertension and heart disease rising even among women. So, take some time out of your daily chores and buy yourself a cover this Women’s Day.

Health insurance

These are indemnity plans that would reimburse the cost of treatment on hospitalisation up to the sum insured (SI) under the policy. Once you buy the cover, you can keep renewing it life-long and the policy will pay for all your medical expenses. The common exclusions are pre-existing diseases for a fixed two/three/four-year time-frame, congenital diseases, injuries from war and cosmetic surgery.

If you are a young individual, a plain-vanilla health insurance policy would suffice. If you are healthy, go for a four-year (maximum available) pre-existing disease waiting period, which can help you save some premium. But do not settle for a policy with sub-limits or co-pay clause. You can consider Religare Health’s Care, Royal Sundaram’s Lifeline Supreme or Max Bupa’s Health Companion. If you are married and planning for a baby, buy a floater health cover with your husband from an insurer who provides maternity cover. You can consider Religare’s Joy (gives maternity cover up to ₹35,000 for SI of ₹3 lakh and up to ₹50,000 for SI of ₹5 lakh) where the waiting period for maternity cover is nine months (the least waiting period for maternity cover in the market). Some plans such as Royal Sundaram Lifeline Elite (SI starts from ₹25 lakh) give maternity benefit for up to ₹2.5 lakh, but it is only for floater plans where the husband is also covered. The waiting period here is 36 months.

If you are in your early 40s and looking for a health cover for self and family, go for a floater plan, where a single policy can cover all the members of the family and save you premium. Here make sure you go for a policy that offers restoration benefit. In policies with the ‘restore’ feature, if you exhaust the SI and the no-claim bonus, the base SI will be restored back. Apollo Munich’s Optima Restore comes with the SI restoration benefit. ICICI Lombard’s Complete Health Insurance, Religare Health’s Care, Cigna TTK’s Pro Health Plus, Max Bupa’s Health Companion and Royal Sundaram’s Lifeline Supreme are some policies that also have the restoration benefit.

Critical illness

Critical illness (CI) policies generally come as defined benefit plans, that is, they pay the entire cover under the plan at one go at the first instance of the listed ailment, irrespective of the expenses you incur for the treatment. The money can be used to pay any non-medical expense or even settle outstanding liability, if any.

There are a few women-specific critical illness plans in the market which cover women-specific ailments. One is Bajaj Allianz’s Women Specific Critical Illness plan. This covers breast cancer, fallopian tube cancer, uterine/cervical cancer, ovarian cancer, vaginal cancer, permanent paralysis of limbs, multitrauma and burns. It also pays up to 50 per cent of SI for congenital disability in new born baby. But note that there are specific exclusions under each illness that is covered in the policy. Also, this policy offers a max SI of only Rs 2 lakh.

You can look at common CI plans too, where you can easily get a SI of up to ₹10/20 lakh and a cover for 30-plus illnesses, aside from cancer. The Future Generali Heart and Health Insurance plan can be a good choice here. However, if you are particular about a specific illness, say, heart or cancer or diabetes, you can look for policies that cover these ailments specifically. They would be more expensive than CI plans but offer a more comprehensive coverage.

Among all cancer plans in the market, HDFC Life’s Cancer Care offers the longest coverage — it covers individuals till they turn 85 (the maximum entry age is 65 years). ICICI Prudential’s Cancer Protect is, the other plan you can consider with maturity age at 75. Under Cancer Care, however, note that the premium waiver after diagnosis of an initial stage cancer is only for three years. In ICICI Pru’s plan, premiums are waived till the end of the policy term.

When looking out for cancer plans, you can also consider the new indemnity (reimburse the actual cost of hospitalisation) plans in this category, which are much cheaper than defined plans. You can check out Apollo Munich’s iCan and Religare Health’s Cancer Mediclaim here.

Investments for her

Children’s plans offered by mutual funds help you fulfil your daughter’s dream, whether it be for higher education, a dream wedding or to secure a good lifestyle. Falling under the solution-oriented category, children’s funds are open-ended schemes with a lock-in of at least five years or till the child attains the age of majority (whichever is earlier). These funds are ideal for setting aside money for long-term targets. The compulsory lock-in helps create a corpus for the long haul.

Eight mutual fund companies — Aditya Birla, Axis, HDFC, ICICI Pru, LIC, SBI, Tata and UTI — offer schemes that are specially designed to help investors save for their children’s future expenses.

These funds allow investment only in the name of a minor child — less than 18 years old — on the date of the investment. The applicant can be the parent, step-parent, grand-parent, adult relative or friend. Few AMCs, including Aditya Birla, also allow trusts and corporate entities to invest in the child’s name.

Strategy

Children’s funds follow the balanced approach by investing in a mix of equity and debt instruments. The funds are either equity-oriented hybrid funds that invest predominantly, say, 65-90 per cent in equities or debt-oriented hybrid funds that allocate 20-40 per cent in equity. The rest are invested in the debt assets. In effect, plans with an equity orientation seek to cater to aggressive investors, while those with a debt orientation are for conservative investors. ICICI Pru Child Care-Gift, UTI CCF- Investment, HDFC Children's Gift, LIC MF Children's Gift, Axis Children's Gift and Tata Young Citizen follow the equity-oriented investment strategy, while UTI CCF Savings and SBI Magnum Children Benefit follow the debt-oriented approach.

The recently-launched Aditya Birla Sun Life Bal Bhavishya Yojna offers two plans — wealth and savings — which follow equity- and debt-orientated strategies respectively.

 

 

Performance

Most children’s funds have a decent track record, with many doing quite well over the long term. Over the last five years, funds with an equity-oriented strategy such as HDFC Children's Gift, ICICI Pru Child Care Fund-Gift and UTI CCF - Investment delivered a compounded annualised return (CAGR) of 14-15 per cent while Nifty 50 TRI registered 13 per cent.

The past year has been bumpy for most equity-related funds. Children’s funds also registered mediocre returns over the last one year. However, over a longer period, these funds are wealth builders and help beat inflation returns.

It is worth noting that SBI Magnum Children Benefit fund, a debt-oriented fund which allocated 20-26 per cent in equity, generated 15 per cent CAGR over the last five years, outperforming many equity-oriented funds.

Portfolio composition

On the equity side, children’s funds follow a multi-cap approach and have a diversified portfolio of quality companies across sectors and market capitalisations. These funds invest mostly in large-cap stocks that gave steady returns across market conditions in the past. However, many funds increased their allocation to mid-caps during rallies to spice up returns.

On the debt side, most funds take active duration calls. Allocation to lower rated ‘AA & below’ debt papers has been high in Axis Children's Gift, SBI Magnum Children Benefit and UTI CCF – Savings, which may increase the credit risk in their debt portfolio.

Any investment by the applicant will be treated as a gift in favour of the beneficiary child in the year of investment. The income from the plan will be taxed as per the nature of the mutual funds, namely, equity-oriented or non-equity oriented funds and clubbed in the hands of parents if it is encashed before the child turnss 18.

Sukanya Samriddhi Yojana

You can also consider the government-backed Sukanya Samriddhi Yojana to build a tidy corpus for the education and wedding of your daughter. Under this scheme, you have to invest at least ₹250 a year and can go up to ₹1.5 lakh in a financial year. Deposits can be made in the account each year for 15 years from the date of account opening, and the account will mature on completion of 21 years from the date of opening. The interest rate offered on the scheme currently is 8.5 per cent which is higher than most other fixed income options.

The deposits made to the Sukanya Samriddhi account upto 1.5 lakh is eligible for the deduction under section 80C of the IT act. The proceeds and maturity amount from the scheme are fully exempted.

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