Readers' Corner: Financial planning

Buy it when you have an excess budget, as the standalone will also not come cheap, Kartik Jhaveri

If I am buying a term life insurance, does it make sense to pay upfront or should I opt for an annual payment option?

You may not find many policies offering a single premium facility. If yearly payment is difficult for you, then invest an amount equal to the total premiums through the policy tenure into a liquid fund. If your annual payment is Rs  10,000 and policy tenure is 30 years, invest Rs 300,000 in a liquid fund. After that, each year redeem an amount just enough to cover the annual premium payment. With this strategy, your policy will run as planned and you will make a little extra profit as well.

I want to buy a house. I have two options - either buy one that fits my budget or save money for a bigger one. If I buy now, I am not sure if at a later stage, I can sell it and buy a bigger one. My financial responsibilities will increase with time as the kids grow up. I am 38 with two kids aged nine and five. What would be the right approach?

Buying a house is an absolute necessity. Do it right away albeit a smaller place. Not having stress is equally important. You are moving up in age, kids are small, and responsibilities are limited at the moment. As time passes by and as your income increases, you will always have the option to move to a larger home. You will also not have to pay capital gains tax in the interim as you will be selling one and buying another. The only extra cost would be that of stamp duty and registration.  

There are options to buy critical illness cover as a rider and as standalone policies. Which one would you recommend and why?

Critical illness riders are expensive, and therefore it might be a better idea to consider the standalone policy. Buy it when you have an excess budget, as the standalone will also not come cheap. Do this only after you have adequately covered your health and life. Make a comparison using an aggregator portal or consult an advisor before buying as the features change from time to time.

Insurance companies are launching low-cost unit-linked insurance plans (Ulip) that are supposedly better than even direct mutual funds if the charges are compared. I am 42 , married with one kid aged 12. Do these low-cost Ulips make sense if I want to save for my child?

So far I have not come across too many Ulips outperforming mutual funds. At best, I see them matching performance. But these are really few. You have to think whether  cost is the only consideration for your child's future.

As an investment principle, the merit of the product comes first, then liquidity, taxation and cost (in that order). A suggestion: Do not save for your kid only through an insurance policy. Consider mutual funds as well. Whether you should opt for direct funds or regular depends on your knowledge in selecting funds and convenience. 

As an investor, does it help to invest in international funds to diversify my portfolio?

It is definitely not a bad idea. Certain funds that invest in the US, China, Hong Kong have done quite well. The important thing to understand is that you are also subject to exchange rate risk in these funds. Understand that on an average rupee has depreciated against the dollar and other currencies at an average of about 4-5 per cent each year since 1947. So consider that calculation while investing. Do not allocate more than about 5-10 per cent of your overall portfolio.

The writer is director, Transcend Consulting. The views expressed are the expert’s own. Send your queries to yourmoney@bsmail.in