If you are looking for higher returns and liquidity with low investment cost, you should consider investing in mutual funds to secure the financial future of your children. Equity funds can garner good to great returns in the long term, while debt funds can fetch moderate to good returns in the short and long term.
Saving to secure our children’s future through smart and disciplined investing is one of the most sought-after financial goals. Be it to raise adequate funds for their higher education or save up for their wedding, most parents are willing to walk the extra mile to ensure their targets are met on time.
Here are a few tips in terms of investment instruments which can help to secure the financial future of your little ones.
Public Provident Fund
This government-backed investment instrument is a popular option to meet any long-term financial goal. Guaranteed returns which are higher than most fixed income instruments, high tax efficiency and the power of compounding working in your favour are some of its major advantages. This 15-year investment plan which can also be opened in a minor’s name is currently offering an interest rate of 7.9% and can be considered as a tool to build a fund for your kid’s future.
PPF is also regarded as a super-safe investment tool thanks to its sovereign guarantee whose returns are completely tax-free. Also, you could invest as much as Rs 1.5 lakh every year in PPF in as many as 12 instalments in a year and also claim tax deductions of up to Rs 1.5 lakh under Section 80C of the I-T Act. The only downside could be its liquidity aspect as a PPF account can be closed only after reaching a maturity of 15 years.
However, partial premature withdrawal is allowed from the seventh year onwards. On the other hand, PPF investments can be extended even after 15 years in blocks of five years where investors have the option to either make fresh investments or just stay invested and earn interest without making fresh investments. However, before making fresh investments you must submit Form H within a year of maturity to be able to earn interest and avail tax benefits.
Sukanya Samriddhi Yojana
If you have a girl child below the age of 10 years, you can also consider investing in Sukanya Samriddhi Yojana (SSY). This long-term investment plan also comes with a sovereign guarantee and can be opened in a post office or at any authorised bank. However, you can only open one SSY account for one girl child, and one family cannot open more than two SSY accounts. You can invest anywhere between Rs250 to Rs1.5 lakh in an SSY account in a year and claim full tax deduction under Section 80C. Like PPF, there is no tax on withdrawals. The interest in SSY investments is compounded and deposited annually, and it is currently offering 8.4% per annum.
However, do note that you can completely withdraw SSY investments after its maturity when the girl turns 21 years, or when she gets married post the age of 18, whichever comes earlier. You can also withdraw 50% of the amount after she turns 18 for her higher education, and the remaining amount can be withdrawn when the account closes at 21 years. You will be well-advised to open an SSY account for your daughter as soon as she is born to allow maximum time for your investments to grow.
Mutual funds SIP
If you are looking for higher returns and liquidity with low investment cost, you should consider investing in mutual funds to secure the financial future of your children. Equity funds can garner good to great returns in the long term, while debt funds can fetch moderate to good returns in the short and long term. However, do remember that mutual funds are market-linked products and hence carry moderate to high risk. To mitigate this risk, you should go for the systematic investment plan (SIP) route to avail rupee cost averaging benefits and aim to diversify your investments in various mutual funds as per your risk appetite.
If equity funds are sold before 12 months, the returns are considered short term capital gains and taxed at 15%. And capital gains above Rs 1 lakh for investment tenures above 12 months are considered long term and taxed at 10%. However, investments in debt funds are considered long term only when invested for more than 36 months, and these long-term capital gains are taxed at 20% with indexation benefits. On the other hand, investment returns in debt funds for less than 36 months are considered short-term capital gains and are added to the investor’s income and taxed according to the applicable income tax slab.
The author is CEO, BankBazaar.com