Q1. Is a Contingency Fund Important? If yes, what should it consist of?
Having a contingency fund is one of the prerequisites of good financial planning. It is especially critical to have one when you are married and have a family to support. Scenarios like defaulting on a loan payment due to a temporary shortage of funds, sudden health disorders in the family, being struck by natural calamities (floods, earthquakes) are some examples where contingency funds can be a lifesaver.
Money saved in fixed deposits cannot be withdrawn before the term period; if you do then you will incur penalty charges, which may affect your other financial goals. Similarly equities are a volatile option and never a safe option for a contingency fund. Instead opt for liquid funds like ultra-short term funds, short term deposits or even your good old savings account. These funds allow easy access to money should you require it during an emergency.
Q2. Is Life Insurance Important?
A life insurance scheme is extremely pertinent to your family’s financial security, if you pass away untimely. A good life insurance scheme is one of the best gifts you can give your family. Once you are no longer around, especially if you are the primary breadwinner, things can get difficult in the household – your child’s education expenses, utility bills etc. While life insurance will ensure that your family’s needs are taken care of, an even better way to address this issue is an ULIP (unit linked insurance plan). A ULIP (insurance + investment) is one step ahead of a term insurance plan (just insurance). ULIPs offer you the opportunity for wealth appreciation. A part of your premium in ULIPs in invested in financial instruments like shares/bonds that provide good returns on your money. Thus, while a life insurance can ensure that your child’s current education can continue without hiccups, an ULIP can give wings to his dreams by ensuring that the child can choose to take up an expensive course or study abroad without any financial constraints.
Q3. How can I invest in Tax Saving Instruments?
Wouldn’t it be a great idea to save some money off your income tax? And the best part is, it is not that difficult either. Under the Income tax rules, you can invest in certain financial instruments that offer tax benefits. The section 80C of the Income tax act allows you to avail a tax concession of up to Rs.1, 50, 000. The tax exempted investments are – home loan, provident fund, public provident fund, Life insurance including ULIPs, National savings certificate and fixed deposits. Thus make sure that you restructure your financial portfolio factoring in the tax exempted investments, which in the long run, will save you a considerable amount of money.
Q4. Do high returns always mean high risk?
High returns do not necessarily mean that the risks are higher. There are financial instruments such that offer higher returns than the traditional low return low risk instruments like bonds and fixed deposits. Mutual funds and ULIPs are some examples of high returns moderate risk group. The latter being an even better option as it combines investment and insurance. Thus in addition wealth appreciation, ULIPs also ensure that your family’s future remains financially secure in case of your untimely demise. With ULIPs (the investment part) and mutual funds you can minimize your risks by choosing to invest in funds that generate higher returns yet carry less risks.
Q5. Can you save taxes if you’re a dad in India?
Unfortunately, this isn’t the case even though we are sure that there are other even better reasons and perks because of which you chose the path of parenthood. However, there are ULIPS and other Child education plans that do offer very attractive tax deductions if you invest in them. So looking into them might be a wise idea with the dual purpose of both securing the future of the best thing that ever happened to you as well as saving taxes!