India is at a stage where education received by young children is of sub-standard quality due to a lack of skilled teachers. This has resulted in a demand-supply crisis, which is forcing parents to incur huge expenses to provide their children with a good education.
As a parent you know that coping with these costs is an uphill task. There are no signs of this inflationary trend easing, even in the undergraduate stages of education, let alone post-graduate courses or highly specialised ones like an IIT or IIM degree.
When should you start investing?
The age of your child plays a role in deciding when you should start investing. There is a lot to be gained when you start investing when your child starts going to school. Starting early gives you the advantage of having to invest less. It also gives you more time to save, the ability to take greater risk, and the benefits of compounding. These benefits decrease as your child grows older.
What are the options available to secure your child’s future?
Here are time-tested, proven strategies of how you can plan your investments, taking into consideration the age of your child:
1. Equity mutual funds
It is ideal to start investing in equity mutual funds when your child is young and your retirement is at least 15 to 20 years away. This allows you to bear shocks such as crashes and volatility of the stock market. Investing in equities requires technical knowledge and the ability to stay updated, which is not for everyone. So, the preferable alternative is to opt for equity mutual funds. Experts who know to pick the least risky stocks, while ensuring that your funds appreciate in the long term, manage these.
You can create an equity mutual fund portfolio exclusively for your child’s education. This can be done by opening an account for minors and going for Systematic Investment Plans (SIPs) in aggressive instruments like equity mutual funds, when your child is 4 or 5 years old.
Then, you can adopt a more conservative stance as both you and your child grow older.
2. Public Provident Fund (PPF)
Even after the government reduced interest rates on provident fund accounts, PPF is still preferred by parents. Deposits in PPF encourage discipline, because you cannot withdraw the corpus till the end of the 15-year maturity period. It also lets you enjoy EEE (exempt-exempt-exempt) tax waivers. Since the principal, interest and the total maturity amount are tax-free, you can develop your educational-purpose corpus.
All this while being sure that your money is safe, since the government backs PPFs. But the official interest rates on PPF have already dropped, so depending entirely on PPFs could lead to a shortage of funds. To avoid this, build your portfolio in such a way that it generates higher returns. Pick a good mix of investments, such as PPFs and Unit Linked Insurance Plans (ULIPS) for your child's future.
3. Debt mutual funds
This is a good option to park your funds in, especially if your child is already preparing to go to college. Ideally, you put your surplus money in a portfolio with a higher percentage of exposure to debt funds. Debt mutual funds are financial instruments that invest in fixed income securities like treasury bills, government securities, and corporate bonds.
Since these instruments pay a fixed rate of interest, debt mutual funds are more stable than equity mutual funds. If you're a dedicated investor, you can rest assured that you will get adequate returns. Depending on how much time you have to reach your target, you can divide about 60–70% of your money into debt funds.
4. Money-back insurance plans
These are non-linked plans designed to fulfil the educational needs of your child. They also offer death benefits and a liquidity benefit by providing multiple payouts during the policy tenor. You have the choice of taking the survival benefit (over and above the policy amount) on or after its due date, but during the tenor of the policy. The policy term of a money-backed insurance plan is usually 15 years, while the premium-paying term lasts 10 to 11 years. The sum that one can opt for under this plan starts from Rs. 1 lakh. Some plans also provide rebates if you choose a sum higher than Rs. 1 lakh. These plans usually provide regular payouts. The first payout is of 15%, in the fourth year of the policy term. The second and third payouts are of 15% each, given in the eighth and 12th year. The maturity benefit, which is 55% of the sum assured, is given on expiry of the policy. Apart from your child, you will also receive bonuses on maturity of the policy. As per the prevailing tax norms, the benefits received under this plan are tax-free.
5. Recurring and fixed deposits
As traditional investment options known for their safety, fixed deposits are great alternatives for growing your savings. There are many banks in India that offer fixed deposit plans for children. But these aren't too different from regular fixed deposit schemes. Some of them provide extra protection in the form of insurance, while others only offer maturity payout on expiry. You can open an FD for your child even when he/she is one year old. Investing in a fixed deposit also serves as a good financial buffer to protect your child against any uncertainties. Investing small amounts in recurring deposits can also help you sail smooth despite the rising cost of education. While both deposits work for almost everybody, avoid it if you fall under the 30% tax slab. This is because the high taxation rate can erode the interest by half or more.
6. Investing in gold
Gold ETFs are mutual fund units where each unit represents 1g of gold. These ETFs can be sold and bought the same way as ordinary mutual funds. The reason why you should not hold gold in physical form is because jewellers sell it at premium, the cost of keeping it in a bank locker is very high, the quality could be compromised, and you could end up selling it for much less than its actual market value.
7. Sukanya Samridhi Yojana (SSY)
This is a deposit scheme for female children, launched as a part of the government’s Save the Girl Child, Teach the Girl Child (Beti Bachao, Beti Padhao) campaign. A Sukanya Samriddhi Yojana account is best opened any time after the birth of a girl, up to the age of 10. It can be opened in any post office, or at authorised branches of commercial banks. The account remains operative for 21 years from the date of its opening, or till the girl decides to get married. To let you fund her higher education, you can withdraw 50% of the balance when she becomes an adult.
8. Investing in Unit-Linked Insurance Plans (ULIPs)
ULIPs are units of various mutual funds, sometimes equity and sometimes debt, or a combination of both. There are many ULIPs to secure your child’s future. The USP of children’s ULIPs is that they offer triple brownie points. This is in the form of high insurance coverage, disciplined investments, and participation in the equity market. When the sum is paid to the nominee, the future premium is waived off at the maturity value, ensuring that your children’s future dreams are met. However, ULIPs also have steep surrender charges in the initial years. This is to discourage investors from withdrawing the policy early, with the view of inculcating discipline.
Additional Read: When to start investing for your child’s future?
A look at the various options gives you three important guidelines. Firstly, you must start early. Secondly, assess your appetite for risk again, depending on your age and your earning capacity. Lastly, you must track and revise your plan, because the situation is dynamic and ever-changing. A strategy that suits someone else may or may not work for you.
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