We all want to give the best to our children. We feel that our children do not need to go through the same experiences, difficulties and compromises we had when we were children. And true to our wishes, our children have experienced a very comfortable life where things have been very easy for them. They have been exposed to social media and television at a very early age and have huge aspirations and dreams.

Perhaps one concern we all have is that real life is tough and our children need to realise that. They need to realise the amount of hard work and effort that goes into earning money. As parents, we all wish that our children are much more sensible and careful when it comes to dealing with money. However, this is not something that will be easy for you. Inculcating the right understanding, respect and value for money and developing the right habits from an early age will take time and patience on your part, perhaps many months and even years. In this article, we will explore a few of the ways we can let our child on the path to financial literacy and right habits.

Things to do ...

1. Recording: The first step which everyone should do is to ask and teach the child to record all his/her spendings. Please do not comment or make any negative observations here as the child may stop recording those things or hide them from you. Let them record everything without fear. There are many mobile apps which help record expenses or instead this can be done the old way – pen & paper or diary.

   Motivate them to keep track of their spendings and give them pocket money with the small condition of maintaining the records and sharing it with you for next pocket money. Once there is a track of spendings over a few weeks /months, ask them to make observations. Take a back seat and let them self learn.

2. Budgeting: Once the children are habituated to keeping records, budgeting should come naturally. Follow a fix periodical pocket money /budget for them. To begin with, this can be for say a few days for small kids, then for every week and slowly progressing to å monthly allowance for more mature children. Once the children are habituated to keeping records, budgeting will be very easy as they know they have to live within that budget for the rest of the period. Just ask them their daily balance without making any judgements or comments. Your role should only be to be strict while giving your pocket money. Ask your children for any major events in advance and adjust your pocket money in advance but not post the event.

3. Patience: An essential element of learning is patience and this has to be inculcated slowly. There can be many ways of teaching this. For example, if your child has asked for any particular toy or gift, let them wait for it. You may either give an appropriate future date for the same. Alternatively, you may divide the money and pay them equally over many days while asking them to save the same. Eg. If a toy costs say Rs.2,000, pay them Rs.100 daily for 20 days and make them wait slowly till the full amount is accumulated.

4. Saving: Savings is the most important habit one should focus on developing. With basic habits of recording and budgeting, savings should come easy with patience. Show them how they can cut few corners /spendings and save more. Motivate them for saving with some extra rewards from your end once their savings targets are achieved. For eg., if they manage to save 20% of their pocket money, reward them with say extra 20%. Motivate your children to save larger amounts for bigger and bigger gifts/events. For eg., if they have managed to save say Rs.3,000 for one item/gift, instead of going out and spending, show them better options of say Rs.5,000 and ask them if they would like to have that. Put in your rewards as well. Let them take pride in saving big and then spending. From toys to cycles to electronics to even bikes, this habit can be great learning for your child.

5. Responsibility: Letting children learn with some real responsibility is a good way to teach them great values. One can begin with small responsibilities like caring for toys, asking one to get repairs for broken toys, caring for small pets like fishes in your aquarium or birds or other big pets like dogs for teenagers. Pets can be a very good way to develop empathy as well. Put as much responsibility on them as you can. Try not to interfere even if things may start looking bad, let your children take responsibilities and learn the consequences of not doing what is needed. Of course, you can lend a helping hand when the child is doing something. You may even give the responsibility to say buying food and other things for your pets to the children and allocate a budget for the same.

6. Participating: As your child grows and learns, start involving them in planning your household expenses. Let them also have their own share of inputs on things like outings, entertainment, purchase of electronics, holidays, etc. Value their inputs and discuss options. For eg., if they want holidays at some premium location, ask them if they are ready to forego /cut some spendings and wait longer? Also start to involve them in sharing and monitoring things like investments and insurance. Teach them as and when you start sharing. Slowly ask them to maintain all your financial records and documentation. Also let them participate in your meetings with your financial advisors /insurance advisors /tax consultants, etc.

Lessons and habits learnt at an early age stay for a long time in our lives. For our children who are exposed to a virtual world almost all the time, the realities of life need to be taught within our comforts as parents. Early lessons in money management and instilling the values of understanding of the importance of money, money's real value, patience, delayed gratification, etc will lay a strong foundation for financial well-being in life. This is of utmost importance for your child, even more than any educational course he/she may wish to pursue.

Systematic Investment Plan or SIP as it is commonly known, is an investment plan (methodology) offered by Mutual Funds wherein one could invest a fixed amount in a mutual fund Scheme periodically at fixed intervals – say once a month instead of making a lump-sum investment. The SIP, as we popularly know it, is the ideal way to invest in mutual funds, especially for retail investors. Over the years, it has proved itself as the preferred and the best way to create long-term wealth, without affecting their day-to-day lives.

 Why SIP?

The benefits of having a SIP are well-known among investors today and you are not alone. As per the latest available figures from Association of Mutual Funds of India, popularly known as AMFI), an industry body, there are about 2.98 crore or nearly 3 crores SIP accounts in India through which investors regularly invest in Indian Mutual Fund schemes. The SIP method of investing has been gaining immense popularity in the recent years.

 AMFI data shows that the mutual fund industry had added, on an average, 9.55 lacs SIP accounts each month during the last financial year (FY2019-20), with an average SIP size of about ₹2,850 per SIP account. Today investors are investing about ₹.8,518 crores per month in mutual funds through SIP route. In April 2016 this figure was only about ₹.3,122 crores. That's a growth of nearly 2.7 times!

 The reasons why almost every prudent investor is today thinking of SIP route are multiple. The primary advantage being that helps in Rupee Cost Averaging. In simple terms the Rupee Cost Averaging means that you are investing a fixed amount of money at regular intervals ensuring that you buy more shares of an investment when prices are low and less when they are high. Think of it as buying say gold every month of a fixed amount. As gold prices fluctuate, you will be buying less or more of gold every time. When you do this for a long period of time, your average purchase price of gold per gram or tola will be much lower to the prevalent market prices in future. That leads to better returns over time.

 Another reason why people prefer SIPs is because it help in investing in a disciplined manner without worrying about market volatility and timing the market. SIP also offer great convenience. The SIP instalment amount could be as small as ₹500 per month. There is also the option of choosing the right frequency – say weekly, monthly or quarter and also the preferred SIP date from the multiple date options given by fund houses. As compared to lump sum investment directly in an equity fund at any particular date, SIP is better since that risk of market fluctuation is reduced. However, this is subject to market conditions and also individual investment horizon.

 What is Step-Up SIP and why is it needed?

 Step-up SIP, also popularly known as top-up SIP, is an automated facility through which SIP contribution can be increased by a predetermined fixed amount, or a fixed percentage, at periodic intervals. Thus, with a step-up SIP, the SIP amount increases automatically at a pre-defined rate and period. For example, a person who is investing ₹10,000 every month via a SIP can opt for a step-up plan and ask the fund house to increase his SIP amount by say Rs.1,000 every year.

In a normal SIP done today, of say Rs.10,000, will remain at Rs.10,000 even after say 5 or 10 years. But during this time your savings potential and your goals /aspirations would have also increased. Since most people are too lazy, to voluntarily increase their SIP investment contributions very year, their SIP contributions will likely remain stagnant. They would fail to integrate their income growth with their investment plan. And one fine day the investor will realise that he has lost on the golden opportunity to save more through SIP in past so many years. This is where step-up SIP steps in as an automated function and facilitates long-term wealth creation. Over time, as your circumstances change and your income grows, you are likely to have more money available to invest. The step-up SIP will take care of your growing savings potential and evolving financial goals with time. 

In short, if you continue investing with a fixed SIP amount, then you are not taking a wise move and loosing out on the wealth creation opportunity in equities in long term. You need to opt for a Step-up SIP. 

SIP Step-up can be done quarterly, half-yearly or annually. It can also be planned as a fixed amount of increase or a fixed percentage of SIP amount. For example, you can either increase it by say Rs.5,000 every half year or say 10% every year. The increase in the SIP amount should ideally is based on your expected rise in income and your requirement for achieving your financial goals. Just to add, even big financial goals, which look unachievable today or command very high fixed SIP amount today, can be expected to be achieved with a smaller but a rising SIP.  A Step-up SIP is necessary to fulfil goals faster, with a bigger corpus than planned and also get returns that counter inflation.

 Why much can I benefit?

 Step-up SIP incorporates the power of compounding so that the investors can reach their financial goals sooner. It works wonderfully well in long term. Here is a simple comparison for how much wealth can be potentially created with step-up SIP. We consider that the starting SIP is of Rs.10,000 monthly and the expected returns is of 12% annualised. Step up

As you can clearly see, the step-up SIP can greatly benefit wealth creation and will give compounded benefits especially over long term. The difference over a normal fixed SIP is staggering in long term.

  Just to summarise, topping up an SIP offers the following advantages:

• Adapts to your rising income - you can plan an increase in SIP in line with your income and savings potential increase every year - either in fixed amount or percentage. We would prefer you decide on a fixed percentage rather than an amount.
• Achieve goals faster - step up SIP would bring big financial goals within your reach and/or help them achieve faster.
• Helps fight inflation - Many investors choose to increase their contributions to stay in line with inflation. As inflation consistently erodes the value of your money it may be wise to raise contributions to an investment plan for the long-term.
• Allows you to keep investing in an existing plan rather than open a new one - This facility also saves you from the hassle of managing multiple SIPs. A rise in income need to be systematically invested. But looking for a new investment opportunity is tedious and time-consuming. Instead, topping up an existing investment could be the most efficient option.

How to start Step-up SIP?

SIP is a very convenient method of investing in mutual funds through standing instructions to debit your bank account every month, without the hassle of having to write out a cheque each time. The step-up SIP works in similar fashion. While starting a new SIP, an investor can choose the step-up option. While completing the form, the investor is required to enter the initial amount, step-up amount, step-up frequency. This is operationally very convenient and easy so let us not bother too much about same.

However, we would suggest that you talk to your financial advisor /mutual fund distributor today on your financial goals and your investment plans to not only start a normal SIP but a step-up SIP.

Happy investing.

Have you ever asked yourself – what has all the technology advancement and development around brought us? Has it really added value to our lives? Has it added happiness, contentment and sense of security to us?

It would be a true eye-opener if we could ask this question to us every now and then. Those past their 30s would fondly remember the good old days when we had little possessions but also little to worry about so many things in life. We had plenty of friends, relatives and time to enjoy life. Were we not happier then?

Recently, there was a whatsapp forward which made me wonder about these things in life. Of course, there are many advantages of modern life which we could even dream off few decades back. Technology advancement and development and impacted every bit of our lives, be it medical care, communication, entertainment, education, travel, work or the daily comforts in our life. It has surely made our lives more comfortable and without boundaries.

The past few decades have also seen an alarming change. Wealth and income inequality has increased anywhere in the world despite substantial geographical differences. Today, the richest 1% are twice as wealthy as the poorest 50% put together globally. Unfortunately, the rising income disparity is true even for India. There is much evidence that rich are getting richer and poor are getting poorer, everywhere.

There is a visible change in our society happening in the past few decades. Families are growing smaller and more distant. We are becoming more commercial in our social dealings and there is much materialism which is evident in almost all aspects of our lives. True, the income opportunities may have increased for many but only a few have managed to increase their wealth substantially. In this article, we will focus only on this critical aspect of the modern life which has direct, tangible and measurable impact on our financial well-being.

Why are we not getting rich?

The Savings trap:

Post economic liberalisation in 1991, India pursued a path which encouraged open market and privatisation and capitalism. A change from the socialistic approach which was followed for many decades without visible growth in economy or the standard of living. Post this change, many new industries and markets took birth and prospered. The people who participated in this growth saw their wealth growth. However, a majority of the people did not participate in this economic growth of India.

Between 1979 (base year for Sensex launched in 1986) and now, the Sensex has grown from 100 to 41,150 in 40 years. That's gives us an annualised growth of 16.25% without counting dividends! Your money would have multiplied more than 411 times during this period. However, the only people who benefitted where those were the industrialists, entrepreneurs and the equity shareholders from this growth. Be it due to traditions or culture or awareness or lack of proper markets, a lot of us and our parents avoided equities. We gave our money to banks and government savings plans which gave us a paltry single digit returns.

Even today, equity savings culture has not growth substantially. A lot of us are looking at sovereign or guaranteed investment options which give us negative real returns after tax (real returns is returns less retail inflation). This simply means that even though we feel we are saving money, the fact is that we are eroding or slowing burning our money. The unfortunate irony is that we are happy to get that.

Here is a short example to get this message home. You get returns of 7%. Tax rate applicable is 30%. Your net returns is 4.9%. Inflation in December, 2019 was 7.35% as against 5.54% in November 2019. Even if we consider an average of 5%, for all practical purpose, we are loosing our money by 0.1% yearly.

In short, even though we are earning more than before and saving even more, we are not really creating wealth over time. This is the savings trap we need to break. Think over it.

The Security trap

We don't have adequate social security in India. That's an unpleasant and unfortunate fact. Even if available, often it is grossly inadequate. It is just about enough to cater to the 'poor segment' of the population but inadequate as far as the middle class is concerned. There is no debate that events like accidents, sickness, diseases, disability, death etc carry a huge burden on us and often give us unbearable financial shocks. I am not even counting things like theft, fire, etc for properties here.

There was an alarming report published in June 2018 by experts from Public Health Foundation of India. The report said that 55 million Indians were pushed into poverty in a single year because of having to fund their own healthcare and 38 million of them fell below the poverty line due to spending on medicines alone.

Most of us do not have the full required range of insurance of ourselves. Life, health and personal accident insurance are the three critical insurance policies we should have but most of don't. Even for those who have the same, most of the times there is underinsurance. A lot of insurance agents who sold traditional life insurance policies which promised nominal returns at the cost of insurance coverage, did grave injustice to investors. The investors neither got adequate insurance nor created wealth. Pure term insurance products was rarely sold till only recently when there was demand for same from investors.

The Spending trap:

In the past few years, we have undergone a cultural and behavioural change when it comes to our spending habits. As kids, we used to buy new clothes and shoes only on Diwali. We spend little on electronics, ate outside very rarely and went on holidays like on budget trips (by today's standards). We bought things only when we had money and we rarely borrowed as it was considered not good in our upbringing.

Cut to today. There is a popular line which says 'today we spend money which we don't have on things which we don't need to please people who we don't know'. We have replaced what we need with what we desire and what we can afford the most, by stretching our budgets. We buy the best gadgets we can even though the old ones are working fine. We buy cloths, watches, shoes, cars as a status symbol. We holiday in exotic locations to post pictures on Facebook and get happy on the likes. Today our celebrations for birthdays, anniversaries, marriages are grand and lavish. We are buying things on loans which are based on our current /projected income growth.

Unless we break this spending trap, we will not realise the full opportunity of saving and investing in growth assets. Every time we spend unnecessarily, we are sacrificing future wealth for our immediate gratification. This has to be controlled and if possible, stopped.

Conclusion:

It is not possible for 'all' of us to become very very rich in our lifetime. To be honest, most us avoid taking risks and/or do not have the necessary skills or talent or opportunities to do so. But we can all strive for a much better future for us and our families and we can become rich by our present standards. At the worse, we should avoid stagnating at our current levels of wealth (in real terms) while making sure that we never fall down from our present levels. Remember, it is not just important to become rich but also stay rich.

The clear message is that we need to get over the three traps mentioned in this article. How? We need to [1] save and invest in growth assets that give us real returns in long term [2] get adequate insurance to protect ourselves from any unfortunate events that can wipe out a life time of our savings and [3] control our arbitrary spendings and reduce debt. These simple things are very simple and easy to execute and possible for everyone of us.

As we start a new decade of 2020s, let us also pledge to make this decade a decade dedicated for our family's prosperity and financial well-being.

"Unless you can watch your stock holding decline by 50% without becoming panic-stricken, you should not be in the stock market." - Warren Buffet.

These words spoken by the investing legend has proved to be true in the present market conditions. The past two decades have seen a few such times of uncertainty and market crashes. Beginning with the dotcom bust in 2000, quickly followed by the 9/11 crisis in 2001 and later the global financial crisis in 2008-09. Time and again, the message to equity investors has been clear.

• Equity markets carry unforeseen risks.

• Markets can be highly volatile in the short term.

• Over long periods, equities are good wealth creators.

These learnings have been reinforced in the current markets. However, for many new investors, especially millennials who have started investing in the past decade, the temporary crash may have come as a surprise. It would be perhaps best if we set ourselves in the right mindset, attitude and expectations. Here are a few things that you must remember with equity investing…

Focus on basics:

Risk comes from not knowing what you are doing. Before starting with equity investing, it would do us good if we understand the asset class properly. Equity is not recommended for everyone and it has to match your risk profile and investment objectives. These are the prerequisites of equity investing and the next step is deciding on your asset allocation. A properly diversified portfolio with proper adherence to asset allocation over time is a very basic principle and strategy for portfolio management. Apart from this, starting early, choosing the right product for the asset class and investing regularly are other basic points one needs to follow. Stock selection and market timing have been repeatedly flagged by experts as futile as they cannot be practised accurately and sustained over long periods of time.

Long-Term:

How much is long-term? Many investors might be wondering. This is really a subjective question and there is no right answer. At times, market crashes can potentially wipe out many years of growth. Looking at returns during such temporary times is not the right thing to do. History has shown us that there are much more ‘positive’ or bullish investors than ‘negative’ or bearish investors by nature. That's why we find the bronze sculpture of the ‘Charging Bull’ or the Wall Street Bull standing on Broadway in the Financial District of Manhattan, New York City. Thus, markets have remained in bull and or neutral market phases much longer than bearish phases. Thus, the probability of profits increases as you increase your horizon. For many, long term is anything over 10 years but every wise investor agrees that it must never be below five years.

Conviction:

Investors who demonstrate conviction, especially during market corrections, have a big advantage over those who do not have such conviction. Typically equity assets change hands in markets when such conviction is tested. Your buying at lower prices means that someone is selling at those prices, booking losses or forgoing future profits. That is the cost of not having the conviction that the person is paying and you are benefitting from. As Indians, we are blessed to have a growing economy with huge potential for growth over the next few decades. It is destined to emerge as a global economic powerhouse within our lifetime. Equities should give us the opportunity to participate in that growth.

Patience:

“If you aren’t willing to own a stock for ten years, don’t even think of owning it for ten minutes” - Warren Buffet. Patience is simple yet very difficult to practice. In a fast-paced world, we expect that our investments too deliver returns within a year or so. Most investors become impatient quickly and either redeem or move their investments if returns are not visible soon or if there is a correction in prices. There is absolutely no need for ‘active’ portfolio management for long-term wealth creation. Many studies point out that it is not very helpful to do so. Only those investors who have patience, stay invested with conviction in equities will emerge successful.

Courage for Action:

All the world’s knowledge and wisdom is futile unless it is put to use. Many investors, in spite of having all the knowledge and even guidance from advisors /experts, fail to take timely and/or required action when needed. The courage to back your conviction is the last impediment to success as an equity investor. Investors to be really successful, have to back their basics, long-term investment horizon, conviction and patience with ‘meaningful’ action to get ‘meaningful’ results. Going forward, we would do well to stay put and perhaps even increase allocation in a staggered and disciplined manner.

Conclusion:

We have summarised almost all the key points necessary to be reminded at current times. We believe that the uncertainty is still not over and we may expect subdued and volatile markets with low economic growth in the coming months. We must stick to basics, not panic and follow the disciplined approach to investing. Covid-19 has made us realise our weakness as humanity and also showed us a mirror in many aspects of our lives. Let us take the investing experience also in our stride and put it to good use in future.