With the cost of higher education increasing rapidly, parents need to select investment instruments after understanding their respective advantages and disadvantages and then frame a proper asset allocation strategy with a long-time horizon. Investment for children’s needs must comprise a combination of Public Provident Fund (PPF)/Sukanya Samriddhi, a child plan policy from a life insurer and solutions-oriented plans from mutual funds.
While investing for your child’s higher education, factor in the inflation rate, time-frame of investment and the risk profile of the investment, especially if these are market-linked. Typically, for higher education education expenses, if the present value is Rs 10 lakh, after 18 years, the required corpus would be Rs 30 lakh, or three times the present value, assuming an annual inflation of 6%.
PPF, Sukanya Samriddhi
Investing in PPF in the child’s name can help build a part of the corpus required for higher education. The account will be under the guardianship of the parent till the child is 18 years old. If you have a PPF account in your name, then the investment in both the accounts (parent and child) can’t exceed the overall limit of Rs 1.5 lakh in a financial year.
You can open a Sukanya Samriddhi account in the name of the girl child and invest up to Rs 1.5 lakh in a financial year. The account can be opened up to the age of 10 years only from the date of birth and money can be withdrawn after the girl child attains age of 18 or clears 10th standard.
Solutions-oriented mutual funds
Solution-oriented funds are hybrid funds which can help build a corpus for higher education for children. Solution-oriented funds have a lock-in of five years. Parents should ideally invest in these funds through systematic investment plans. The longer holding period helps balance any short-term market volatility. These funds are passively managed as the fund managers match the performance of a benchmark index. Experts say parents should not just bank on solutions-oriented funds but diversify by investing in open-ended equity diversified funds as they give more flexibility to build one’s portfolio for long-term goals. As solution-oriented funds are hybrid funds, returns could be less than equity funds.
Child plan from life insurers
Insurers offer single-premium child plans. If you need a lump sum for the child’s higher education, go for child traditional endowment policies. Under child insurance plans, you can invest a fixed amount as a premium for a specific period and get the fund value at the end of it. The risk cover in child insurance plans is for the earning parent.