Before you venture out picking the right child investment plan, work with numbers to find out exactly how much you need to save for the goals.
There are several investment options to secure your children’s future and selecting the best child investment scheme may not be an easy task. Rather than looking for the best scheme for child benefit, it is better to diversify across a few investment options.
Some investments are exclusive for children’s needs such as education and marriage while most others such as equity mutual funds, gold ETFs etc can also be purchased for the benefit of the children. Each scheme will have its own features, structure and will work differently. Hence, knowing how to invest in them to make them meet your long-term goals is important.
How much to save for child education
But, before you venture out picking the right child investment plan, work with numbers to find out exactly how much you need to save for the goals.
For instance, growing at an inflation rate of 6 per cent a year, an engineering course that costs Rs 5 lakh presently will cost around 12 lakh after 15 years. Without the impact of inflation, you just need to save Rs 1000 a month to get Rs 5 lakh after 15 years at an assumed growth of 12 per cent annualized.
So, at a growth rate of 12 per cent, you need to put aside around Rs 2500 per month to reach that goal of Rs 12 lakh after 15 years.
Sukanya Samriddhi Yojana (SSY )
You can invest in Sukanya Samriddhi Yojana (SSY) only if you have a girl child below 10 years of age. SSY is a government scheme and the rules allow for the opening of a maximum of two accounts for two girls in a family.
Sukanya Samriddhi Yojana can be opened in a post office or a bank. One can also make deposits through electronic means, i.e., e-transfer to the concerned post office or bank if the core banking facility exists in them.
To open an SSY account, a minimum initial deposit of Rs 250 is required. Thereafter, a minimum of Rs 250 up to a maximum of Rs 1.5 lakh can be deposited in the account annually. On opening an SSY account, one has to keep depositing for initial 15 years, although the scheme os for 21 years. If the child’s age is 6 years, the SSY scheme will mature when the child’s age is 27.
At age 18, rules allow the parent to withdraw for the child’s marriage purpose. A maximum of 50 per cent of the account balance of the the preceding year may be withdrawn for the purpose of higher education of the girl. The rules also permit final closure anytime before 21 years if the parent files an application for such premature closure for the purpose of her marriage and confirms through an affidavit that the applicant is not below 18 years on the date of marriage.
Public Provident Fund (PPF)
Even if you have a PPF account in your own name, you are allowed to open another account in the name of your child. However, a maximum of Rs 1.5 lakh can be put into them (parent plus minor account) in one year. In addition to one’s own account, open a PPF child account in kid’s name and keep contributing into both of them. The principal invested in PPF qualifies for deduction under Section 80C of the Income Tax Act, 1961 up to a maximum limit of Rs 1.5 lakh in a financial year. Investment made in self and kid’s accounts will both count towards tax benefits.
Child plan with waiver of premium (WOP)
There are specific life insurance plans with waiver of premium (WOP) rider or benefit that suits investing for children needs. The feature of Waiver of Premium in a life insurance policy ensures that the policy does not end or become inactive even after the death of the policyholder or due to the inability of the policyholder to pay the premium. The insurer pays the sum assured and also keeps putting in the premium into the plan on the due date. This ensures the fund value is for the child at the desired age.
Mutual funds for children’s future
Investing in equity mutual funds for children’s goals that are at least seven years away can be considered by young parents. Build a core portfolio with consistently performing schemes across large-cap and mid-cap funds. Some portion may also be put in index funds but importantly keep a create a separate portfolio for child goals and continue investing till about three years away from the goal.
Buying Gold ETF
As a parent, many want to save for children goals by buying gold. A more cost-effective way to invest in gold is through gold exchange-traded funds (ETF). Gold ETFs represent paper gold and are somewhat similar to buying MF units. Such investments (buying and selling) happen on a stock exchange (NSE or BSE) with gold as the underlying asset. One can buy gold as low as 1 gram on regular basis and accumulate gold over the long term.
Alternatively, there are sovereign gold bonds (SGB) issued by the government on a regular basis which may also be bought. SGB comes with a maturity period of eight years (lock-in ends from the 5th year). A fallout of gold ETF is that the units won’t earn the additional interest of 2.5 per cent per annum that SGB earns.
Along with investing in equity mutual funds, open a PPF account, and buy Sukanya Samriddhi Yojana online to save for child goals. While selecting gold investments, keep factors such as taxation and liquidity while evaluating gold ETFs and SGB. Most importantly, do not stop saving because of market conditions and also do not divert funds earmarked for children’s needs to other goals.