Planning for the child’s secured future is not an easy task. Most of the people try to create a strong financial cushion for their child but find their funds insufficient at the time of need.
Inflation may be down to nearly zero but a major expense of the average Indian household is growing at a fast clip. The cost of higher education is already high and rising at 10-12 per cent a year. Children’s education is one of the biggest cash outflows that families must plan for. A four-year engineering course costs roughly Rs 6 lakh right now. In six years, the cost is likely to touch Rs 12 lakh.
The earlier generations had it easy. Competition was low and the fee in government institutions was modest. Now, the heightened competition for admission to quality government-run institutions is forcing students to turn to more costly private institutions.
Best ways to invest for your Child’s Education
- Be an Early Bird
One obvious solution is to start saving early. The individual will not only be able to amass a larger sum, but the money will also gain from the power of compounding. A corpus of Rs 1 crore may seem daunting, but it’s possible to save this amount with an SIP of Rs 9,000 for 18 years in an equity fund that gives a 15 per cent return.
The changing nature of employment also makes it necessary to start early. People are increasingly dropping out of the workforce in their late 40s and early 50s as younger workers, who are more energetic, possess the latest skills and cost less, are ready to replace them.
- Play it safe in the Short Term
If you have a time horizon of less than five years, you will have to rely primarily on fixed income instruments, which are likely to offer a lower rate of return. However, these offer guaranteed returns and safety of capital. In the short term, these factors become very important. Though fixed income investments are fairly safe, don’t invest at random. “Make sure that liquidity will not be an issue when you invest in debt instruments.
- Review the Portfolio
Once your portfolio is in place, you need to review it at least once a year. You should also check whether the amount required for meeting the goal has changed. The education goal has two components: tuition fee and cost of living. Any of these could rise faster than anticipated. You need to find out whether the 12 per cent inflation rate that you have assumed is a realistic estimate.
Your annual review should include keeping tabs on the performance of the funds in your portfolio. If a fund is lagging, do not sell it immediately. Stop your SIP in that fund and start it in another better performing fund. Watch the performance of the laggard for 3-4 quarters and only then decide to sell it.
5 Best Child Investment Plans in India
1. Sukanya Samriddhi Account
Another good scheme to invest and which can help build a corpus for your child’s education and is an excellent child investment plan is the Sukanya Samriddhi Account. This scheme offers an interest rate of 7.6 per cent and is tax free. Of course, you can consider this only if you have a girl child.
There is also a tax benefit offered under Sec 80C of the income tax act. One has to be careful that this scheme is only for the girl child. So, if you have a girl child and plan to save for her marriage or her education, you can go for this scheme. Again, the lock-in is the only worry, but, then you are building a sound corpus for a longer time. The only problem with this scheme is that there could be revision in interest rates from time to time. The interest rate offered is way higher than banks, which is a big positive. Again, there could be a upward revision in interest rates, when the government moved for a revision later this month.
2. Systematic Investment Planning (SIP)
For goals like accumulating funds for a child’s education, marriage, etc. investment in equity mutual funds through SIP can be considered as an ideal investment choice for the long-term. An individual can invest for tenure of 10-15 years in SIP, with a minimum investment amount of Rs.500.
For instance, if you invest Rs.6000 per month for tenure of 18 years (time period is taken as from the time the child is born till he/she goes for higher education) in equity mutual fund, then, assuming the 12% annual interest rate, you can gain a capital appreciation of Rs.45.9 lakh. Assuming the inflation rate of 6% the worth of this accumulated fund will be Rs.23.4 lakhs. With the benefit of the power of compounding, the returns offered by equity mutual funds are more effective to beat the 5-6% inflation rate every year. Thus, it makes the SIP investment one of the best investment plans for child in the long-term.
3. Gold Saving
You can invest in gold for a child of yours. But, do not do it through physical gold. The best option would be the gold ETFs, because there is no locker and other storage charges. Also, you can invest in the electronic form and there is no worry of theft. You can invest small amounts each month and thus build a sizeable one by buying small amounts. Gold has generated much better returns than most asset classes in the longer term. So, typically a holding period of say 10-15 years could result in decent gains. The disadvantage of course is that you have to pay capital gains tax when you sell. However, you can also go for jeweller schemes, which would be helpful if you have a girl child and have some jewellery for her.
Risk of fall in gold prices remains a worry, though over a period of time, gold has always outperformed. At the moment 22 karats gold in Mumbai is trading at Rs 31,000. Because of hardening of interest rates, gold prices have fallen a bit. They can be a good bet at the current prices for long term.
4. A blend of Bank deposits and Company deposits
If you are looking at safety and security for your child, you can go for a combination of high quality company FDs, and bank FDs. For example, at the moment, there is the Bajaj Finserv Company FD, which is offering an interest rate of 6.75 per cent on its 3-year deposit, against banks which are offering a rate of just 5 per cent.The yield on these deposits works to a cool 7.5 per cent.
However, the problem with company FDs is that their tenure is mostly capped at 5-years and there are very few deposits that offer you tenure of 10-years and above. In any case, of TN Power Finance FD, the interest rates go as high as 8% for regular and 8.7% for senior citizens.
5. Debt Fund
As compared to equity mutual funds, debt funds include low risk. The funds are invested in different bonds or deposits and gain interest by lending the funds. As a low-risk investment option debt funds offer a regular return on investment. Debt funds can be used to fulfill the recurring expenses of the child, like school fees, any medical emergency, etc. The investments made in debt fund are for the short-term and offers an annual return of 6-7%. Moreover, debt funds are flexible and allow withdrawal whenever required.