Give growth to the wealth you gift to your grandchildren
Written on Wednesday, January 17, 2018
By Varuna Ladha
“Someone is sitting in the shade today because someone planted a tree a long time ago.” -Warren Buffet
Mr. Akash Verma's investment portfolio consisted of some inherited investments from his maternal grandfather. He was told not to sell the investments until he is in dire need of money. It was surprising to see the wealth creation it had done for him just by holding on to those investments for a long long time. Apparently, these investments were held in his accounts for over 40 years and compounding has done its magic. It has come a full circle from grandfather to mother and then to grandchild.
Wealth is one of the strongest elements in grandparent-grandchild transfers. Wealth accumulates within the family. Having wealthy grandparents behind wealthy parents may give an additive wealth advantage to the child. Alongside financial or physical capital passed on from generation to generation, financial support can skip a generation and be given directly to the grandchildren.
There are numerous ways funds can be transferred from grandparents to grandchildren. Some of the ways are traditional like inheritance of certain valuables(art, jewelry etc.) from generation after generation. Our economy is moving towards a more formal market where going forward money will move with purpose and instructions. Especially after demonetization, available funds are now in bank accounts. 63000 folios of mutual funds are being added every day as of now. Accounts have started opening in junior’s name and money is being mobilized into mutual funds, insurance, and ULIPs. Post demonetization and digitization, we can invest in child plans and even do plain vanilla investments in various mutual funds available. It can be monitored online.
A lump sum investment can be done for a special occasion or ongoing SIPs can help build a corpus. As it is a long-term investment, one can go for equity mutual funds, as equities give higher returns than other asset classes over long periods. There are two ways to invest in a mutual fund scheme for one’s grandchildren. First, one can invest in one’s own name and make the child a nominee through a will. Second, one can invest in the name of the child as mutual funds are allowed to accept third-party cheques.
To invest in the name of a child, he or she should have a bank account. The child should be the first and sole holder in the folio. Looking at it with a long-term view. An ongoing investment which can continue for another generation can build a fortune. For inference, SIP investment of Rs 5000 per month for 60 years (taking it further into another generation) at 12% rate of return will make a corpus of Rs 64.9 Crores.
A one time investment of Rs 10 lakhs for 30 years(lumpsum given from grandparent to grandchild) at 12% will give you return of Rs 2.99 Crores Now we can hold so many investments digitally which can be monitored by all generations simultaneously that investing for grandchild is a sure shot way to transfer and create wealth.