Money management for kids: Early exposure shapes financial habits

Real-world, hands-on experiences teach kids valuable financial lessons as they watch their money work for them, helping them achieve their goals, whether it's saving for college, or even their first car.

Money management is an essential life skill, yet it isn’t a part of our formal educational curriculum. Children usually pick up money management habits from their parents, and it is therefore critical that parents promote financial education from a very early age.

Here’s how you can make financial literacy fun for your kids through simple activities:

Understanding money (age 4-5 years)

Teach them the value of coins and let them sort coins. This will not only help them understand what money is, but also learn how to count it. Tried and tested concepts like piggy banks help kids familiarise themselves with money at a young age.

Earning their allowance (age 6–10 years)

Teaching your kids the value of earning money from a young age is critical, because it helps them understand the concept of income, budget, and living within their means. Let them earn their allowance by conducting simple tasks like cleaning their room, assisting you with grocery runs, etc.

Learning about banking (age 11–14 years)

Ease your kids into understanding the concepts of savings, investment, taxation, and more. If your child has saved up from their allowance, give them an incentive to retain their savings instead of spending it.

For every Rs 1,000 they save, contribute Rs 50, emphasising the idea that savings can lead to greater financial outcomes. It also simplifies the concept of compounding for them, because an interest of Rs 50 each month motivates them to save the money for a longer period.

Learning about investing (age 15-18 years)

Help your child start a systematic investment plan (SIP), which allows them to regularly invest a portion of their saved money. Explain how the money they invest will grow over time. You can make investing more engaging by purchasing shares of a company they are passionate about, effectively making them part owners of that company.

These real-world, hands-on experiences teach kids valuable financial lessons  as they watch their money work for them, helping them achieve their goals, whether it's saving for college, or even their first car.

Message to parents

It is important to cultivate the right financial habits in your children from a young age. This includes speaking openly and frankly about money. The world we live in is increasingly promoting spending patterns that can lead to harmful money habits.

A classic example is the option of ‘buy now, pay later.’ These things lead to individuals prioritising an unaffordable and unsustainable lifestyle over the longer term.

Consumption spending has become the norm, which could lead to an uncertain financial future due to lack of financial discipline. Unless your child has understood the upsides and downsides of money management, they can’t be in a position to make well-informed financial decisions as adults.

 

What is QIP, why is it a preferred route for companies to raise funds

With the stock market booming, many companies are rushing to raise capital for a variety of purposes. The Qualified Institutional Placement (QIP) route is turning out to be the preferred route for most firms llooking to raise capital. This explainer decodes the QIP and why companies like it better compared to conventional routes like follow-on public offering (FPO) or a rights issue.

First up, what is QIP?

It is a capital-raising tool allowing listed companies to raise funds from qualified institutional buyers (QIBs) by issuing fresh equity shares, fully and partly convertible debentures, or any securities other than warrants convertible to equity shares.

Who are these Qualified Institutional Buyers (QIBs)?

Public financial institutions, scheduled commercial banks, mutual funds, insurance companies, foreign portfolio investors and foreign institutional investors.

Can retail investors and high networth individuals (HNIs) invest in a QIP?

No.

Why is QIP attractive to companies?

Because it helps them avoid the lengthy and complex processes of an FPO or rights issue. Also, since QIBs are sophisticated investors, they have a long-term perspective, which helps in price stability.

Can promoters participate in a QIP?

No.

Are there rules on the minimum number of institutional buyers that should participate in a QIP?

If the issue size is more than Rs 250 crore, there should be at least five buyers. Any single buyer cannot be allotted more than 50 percent of the stake. If the issue size is up to Rs 250 crore, there should be at least two buyers.

What is the basis for pricing of a QIP?

Under SEBI regulations, the issue price should be not less than the average of the weekly high and low of the closing prices over the past couple of weeks.

Why can’t it be less than the average?

There have been allegations in the past that promoters were allotting shares to their favoured investors cheaply. The QIP price has a bearing on the stock’s market price.

Can the QIP issue be priced at a premium to the market price?

Yes, it can be. But QIBs typically ask for a discount. That is one of the reasons they participate in such a placement. They can get a good quantity without driving up the stock price, unlike buying in the open market.

What if a QIB does not have a long-term view and wants to sell the next day after being allotted the shares?

It can’t. Securities allotted in a QIP are subject to a lock-in period of six months from the date of allotment. This is intended to ensure that only QIBs with a medium to long-term view participate in the issue.

 

What is Asset Allocation?

When it comes to investing, you can only rely completely on any single type of asset. Instead, it’s better to spread your money into different types of investments, like stocks, mutual funds, bonds, and real estate. It helps reduce the risk of losing all your money if one investment doesn’t do better.

In this blog, we will discuss asset allocation, the types of assets you can invest in, the key asset allocation strategies, and how you can choose an asset allocation strategy that is right for you.

What is Asset Allocation?

Asset allocation is the investment strategy to balance risk in which you allocate your money to multiple asset classes, such as equity, debt, stocks, and gold. The primary purpose of asset allocation is to ensure that your portfolio performs well under different market conditions. This can be done by ensuring you have a diversified portfolio of different asset classes, as no asset class performs well at all times.

Importance of Asset Allocation

Asset allocation is important for several reasons:

• Risk Management: By diversifying investments across various asset classes, you can easily reduce the risk in the overall portfolio, as the performance of your portfolio is not dependent on one asset class.
• Enhanced Returns: You are expected to earn better risk-adjusted returns if you allocate assets per your financial goals and risk tolerance. 
• Achieve goals: Asset allocation strategies helps you in achieving your financial goals as it spreads your investments across different types of assets considering your risk-taking ability. 
• Avoiding Concentration Risk: Spreading investments across different assets prevents overexposure to any single asset, reducing the potential negative impact of a poorly performing investment.

Different Asset Classes

The 4 main asset categories available to Indian investors are:

• Equities: Under the equity asset class, you directly invest in any listed company. In return for your investment, you receive shares of the company. These are considered more risky investments due to their volatility. Equity-oriented investments include equity mutual funds and stocks. 
• Fixed Income: Fixed income asset class is considered low-risk investments, giving you a regular income over the investment period. It includes FDs, money market instruments, corporate bonds, government bonds, etc. 
• Real Estate: Real estate can offer attractive returns through property appreciation and rental income. It includes investment in residential or commercial buildings, lands, etc. But to invest in real estate, you need a big corpus. Also, real estate investments are less liquid than other investments, as you can not sell them at any time or a fraction of them. 
  Another option is REITS (Real Estate Investment Trusts ), wherein you invest in real estate without owning any physical properties. You earn regular income through dividends/interest payouts and also earn potential capital gains at the time of selling it. 
• Gold: Having Gold in your investment portfolio is beneficial because it lowers risk through diversification.
  Gold and stocks usually move in opposite directions. This means that when stock markets go down, the price of Gold tends to go up, and when stock markets rise, the price of Gold tends to fall. As a result, Gold acts as a hedge against volatility in the stock market. However, it’s important not to put more than 5-10% of your total portfolio in Gold.

But these are not the only asset classes that you can invest in. You also have the option of investing in asset classes like international equities, infrastructure projects (through infrastructure investment trusts), and even commodities like silver (through silver ETFs), cotton, zinc, etc. However, you can’t randomly choose to invest in any asset class. The choice of assets to diversify your portfolio and how much you should allocate would depend on your asset-allocation strategy. Let’s briefly understand what these strategies are.

Asset-Allocation Strategies

There is no one-size-fits-all approach to asset allocation, as every investor is unique regarding their investment goals, risk tolerance, age, financial responsibilities, etc. But apart from these investor-specific factors, external factors like market movements, changes in interest rates, etc., might necessitate a periodic change in the asset-allocation strategy. There are 4 key types of asset-allocation strategies:

Strategic Asset Allocation

Strategic asset allocation involves determining and maintaining an appropriate ratio of various asset classes in the investor’s portfolio. This appropriate mix of various asset classes in the investor’s portfolio is determined based on factors such as the investor’s age, risk profile, etc. In this type of asset allocation, periodic portfolio rebalancing is performed to ensure that the proportion of individual assets in the portfolio is maintained at the pre-determined levels.

For example, under the auto-choice option of the NPS, investors can choose the maximum equity allocation between 25% to 75% till 35 years of age. However, after the investor achieves 35 years of age, the equity allocation of the portfolio is reduced by a fixed percentage every year. Therefore, the NPS asset allocation is strategically changed as per the investor’s age.

Tactical Asset Allocation

The tactical asset allocation strategy involves tactically changing the proportion of different asset classes in an investor’s portfolio to take advantage of changing market conditions. The main aim of this is to benefit from relatively short-term bullish and bearish conditions in equity and debt markets.
An example of this can include increasing equity allocation in the investment portfolio for the short term during a market downturn to benefit from the lower prices of quality stocks. When markets recover later, these stocks can be sold at a profit to generate higher returns for the investor.

Dynamic Asset Allocation

Dynamic asset allocation is similar to tactical asset allocation as it also focuses on changing the short-term allocation of different asset classes to take advantage of changing market conditions. However, unlike tactical asset allocation, which involves buying and selling investments manually, dynamic asset allocation is performed using automated systems based on financial models. Investors who want their portfolios managed using dynamic-asset-allocation techniques can opt to invest in balanced advantage funds, also known as dynamic asset-allocation funds.

Age-Based Asset Allocation

Age-based asset allocation strategy considers your age as the key factor in determining your equity mutual fund allocation. Under this strategy, your equity allocation is determined by subtracting your current age from the 100. 

For example: If you are currently age 25, then you can have 75% (100-25) equity in your portfolio, and 25% remaining can be debt or any other asset class.

Factors Affecting Asset Allocation

There is a belief that investors must follow standard rules for asset allocation and that the rules are the same for all investors. However, this is not true. Asset allocation varies from investor to investor.

So, how should you decide your asset allocation? Well, one of the most important factors is your risk profile. Every individual’s risk profile is different, and owing to this, the standard rule of asset allocation shouldn’t be used.

Understanding Your Risk Profile

To understand your risk profile, you need to understand three components that constitute your risk profile – risk appetite, risk capacity, and risk tolerance.
You might think of these terms as the same, but you must note that there is a difference between each of these.

1. Risk appetite is how much risk you are willing to take.
2. Risk capacity is how much risk you can take. Although you might be willing to take the risk on your entire capital, your current financial situation, including liabilities, dependents, age, and salary, might not allow you to do that. So, you need to consider these before defining your risk capacity.
3. Risk tolerance is how much risk you can tolerate mentally. For example, if you invest in the stock market, where there are a lot of fluctuations, you must be mentally prepared to tolerate the risk.

Of these three components, risk tolerance is most critical while determining your asset allocation. That’s because you might have a high-risk appetite and risk capacity, but your risk tolerance will determine which asset classes and investment options you pick.

As you allocate assets based on risk tolerance, you must consider personal factors like your monthly income, expenses, age, financial liabilities, your dependents in the family, etc.

Need for Asset Rebalancing in Asset Allocation

Another important factor to consider with asset allocation is rebalancing. It refers to the buying or selling of assets in a portfolio to maintain a balanced level of risk.

For example, suppose your investment portfolio has 45% of your assets allocated to equity, 45% to debt, and the remaining 10% to gold. Now, assuming that the markets are performing well and you make profits on your equity investments, the allocation to equity in your portfolio increases to, let’s say, 52%. Now, because you earned profits on one asset class in your portfolio, the share of the other asset classes would automatically reduce. Since you have earned profits from your equity investments, you can now use those profits and allocate more funds to other asset classes in your portfolio that now have a lesser allocation in your portfolio. This rebalancing will ensure that the asset allocation in your portfolio is again balanced as you originally planned, thereby mitigating the risk.

Note that if you do not rebalance your portfolio, it will be skewed towards one particular asset class and this will increase the risk involved in your investments. For instance, if you favor equity investments, you would start investing more funds in equity. But this may eventually increase the risk involved in your investments.

How to Choose the Right Asset Allocation Strategy

We all have unique goals in life. They define our investment horizons as well as risk tolerance. Therefore, the ideal asset-allocation strategy must be customized to each of the unique needs. The asset mix for each goal should be aligned to risk tolerance, which can change over time due to factors like evolving goals, increase or decrease in income, etc. Therefore, you also need to periodically review your portfolio and rebalance it to ensure you are on track to reach your goal. 

 These 6 investment strategies allow you to invest in customised investment portfolios of mutual funds or stocks and ETFs uniquely suited to your investment needs. These customised investment portfolios ensure you are invested in the correct proportion in different asset classes like domestic equities, debt, gold, and international equities.
Beyond the initial investment selection, Genius will also use dynamic-asset-allocation strategies to determine the best time to enter into and exit from each asset class through one-tap monthly rebalancing of your portfolio. This allows Genius to increase your allocation in different asset classes or even bring it down to zero based on the prevailing market conditions. This way you are assured of optimal returns while never exceeding the overall risk tolerance of your portfolio.

We hope you found this article useful. If you did, please share it with your friends and family and help us reach more people. If you have any questions or need clarification on what we have written in this blog, ask us in the comment section below, and we will respond.

Regards

Mahesh pv

FinCARE PORTFOLIO

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