Arvind Desai has to arrange funds for his son's higher education. He is being persuaded by his wife to take a loan against his Provident Fund (PF). Desai believes that the modest PF corpus he has accumulated as a government employee may not adequately secure his retirement. At the same time, he wants to help his son achieve his dreams. What should Desai do?
Prioritising financial goals can be problematic for investors. When there is a limited savings capability, one must allocate the savings to various requirements in a judicious manner so that the important goals are funded first. In Desai's case, there are two goals to fund: his own retirement and his son's higher education.
The money he has accumulated is insufficient to meet both the goals. The risk that Desai faces in dipping into his retirement corpus to fund the child's education is that it will become smaller. If he draws the money from it, one way to secure it can be to ask his son to replenish it once he completes his education and begins to earn. Many parents implicitly believe that the child will provide them with old-age support.
It will be to their advantage to explicitly secure their retirement fund by involving the child in the decision to draw money from the corpus and eliciting the promise that he replenish it as soon as possible.
The second option available to Desai is to seek an educational loan. The bank will require him to guarantee the loan, but the principal liability will be that of his son. The loan will also enforce financial discipline on his son once he begins to earn. The repayment of loan will impact his son's credit history and he is likely to take it more seriously compared with repaying his own father.
Investment decisions that enable a corpus to grow over time are critical for small savers who may not have enough money to cover all their goals. Desai should also consider some equity investment to enable his corpus to grow bigger, padding up any shortfall from withdrawals.
Involving his wife and son in decision making, keeping in mind the financial position of the family, and without allowing emotions to get in the way, will be in the best interest of all concerned. To avoid regrets, long-term financial decisions need a rational approach.
(Content is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta)
Prioritising financial goals can be problematic for investors. When there is a limited savings capability, one must allocate the savings to various requirements in a judicious manner so that the important goals are funded first. In Desai's case, there are two goals to fund: his own retirement and his son's higher education.
The money he has accumulated is insufficient to meet both the goals. The risk that Desai faces in dipping into his retirement corpus to fund the child's education is that it will become smaller. If he draws the money from it, one way to secure it can be to ask his son to replenish it once he completes his education and begins to earn. Many parents implicitly believe that the child will provide them with old-age support.
It will be to their advantage to explicitly secure their retirement fund by involving the child in the decision to draw money from the corpus and eliciting the promise that he replenish it as soon as possible.
The second option available to Desai is to seek an educational loan. The bank will require him to guarantee the loan, but the principal liability will be that of his son. The loan will also enforce financial discipline on his son once he begins to earn. The repayment of loan will impact his son's credit history and he is likely to take it more seriously compared with repaying his own father.
Investment decisions that enable a corpus to grow over time are critical for small savers who may not have enough money to cover all their goals. Desai should also consider some equity investment to enable his corpus to grow bigger, padding up any shortfall from withdrawals.
Involving his wife and son in decision making, keeping in mind the financial position of the family, and without allowing emotions to get in the way, will be in the best interest of all concerned. To avoid regrets, long-term financial decisions need a rational approach.
(Content is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta)
Source:-The Economic Times
No comments:
Post a Comment