Where to invest for child education: If you are contemplating to save for your children’s education needs, it is time you act fast and avoid any kind of procrastination. As against general inflation, education inflation is rising at a much faster pace. "From primary to secondary to higher education, parents are increasingly finding it difficult to meet the growing fee structure and other costs associated with education," informs Tarun Birani, Founder and CEO, TBNG Capital Advisors. It is, therefore, imminent to save in assets that are capable of generating inflation-beating returns. And, even before you start saving, make an approximate estimate of the inflation-adjusted cost of the course that your child could be interested in a few years down the line.
There are several investment options to save for child education needs – Public Provident Fund (PPF), Sukanya Samriddhi Yojana (SSY) or equity mutual funds being the top three choices for many parents. But, which one is the best among them? Before we know the answer, let’s see what PPF, SSY and equity MF, child MF schemes and child insurance plans have to offer.
1. Public Provident Fund (PPF)
PPF can be opened even in the name of minor children. The maximum that can be invested in child PPF account along with parent’s own PPF account is Rs 1.5 lakh per annum. For the debt portion, one can consider investing in child PPF to create a tax-free corpus for the child backed with a government guarantee. The parent can simultaneously take tax benefit on the PPF contribution made into PPF account of the child. PPF is a 15-year scheme and when the child becomes an adult, the same account can be used by the child for partial withdrawals as well to save tax. After 15 years, the PPF can be extended in a block of 5 years, thus for the child, it will be a 5-year PPF. Currently, the PPF account carries an interest rate of 7.9 per cent per annum, compounded annually and is paid on maturity.
2. Sukanya Samriddhi Yojana (SSY)
Sukanya Samriddhi Yojana scheme is aimed at the financial needs of a girl child. The age of the child has to be below 10 years, while the scheme matures when the child attains 21 years. The SSY deposits made by the parent has to be only for the initial 15 years. The SSY rules allow the scheme to be closed after the child becomes 18 years of age provided it is only for the purpose of marriage. The SSY contributions qualify for tax benefit under section 80C while the interest earned is tax-free. Currently, the interest rate is 8.4 per cent per annum, compounded annually and paid on maturity.
Between PPF and SSY, the interest rate is higher on SSY, while the compounding and tax benefits are similar. For a girl child, SSY can be given a priority but still a PPF for a girl child can be opened with only a small portion going into it.
3. Equity mutual funds
Both PPF and SSY are debt assets and returns will, therefore, be hardly able to beat inflation with a sizeable margin in the long run. For high inflation-beating returns, one needs to have an exposure in equity MFs. Build an MF portfolio with at least 2-3 open-ended diversified MF schemes of the index fund, large-cap fund and a mid-cap fund. Choose schemes that have consistently beaten their benchmark over a long period. Link them to your child goals and continue SIPs in them till three away from goal.
Choice of schemes can also be based on one’s risk profile and the number of years to the goal. "If the child is 5-6 years old, the investment strategy should be aggressive than for a parent whose child is around 15-16 years old. By aggressive we mean, more exposure towards equity. Equity works best for a horizon of above 10 years. For goals between 1 and 3 years- fixed income options such as bank FD, short term debt funds can be looked at," says Birani.
4. Children mutual fund schemes
There are mutual fund schemes exclusively aimed at children needs but they come with a lock-in period. "We have usually observed that immature investors generally have a tendency to move out as soon as the market dips. They do not understand that when it comes to a long term goal, holding your investment despite market volatility is a must to earn inflation-beating returns. On the other side, the fund manager also gets the space to take some aggressive call to earn good returns," says Birani.
5. Child insurance plans
There are life insurance plans which are exclusively meant for child needs. In such child insurance plans, there is a feature of ‘waiver of premium’ that ensures that the child gets the desired sum of money at the right time even if the parent dies during the term of the policy. Such plans come with a higher cost as they come with the assurance of the required amount for child needs.
Between PPF, Sukanya Samriddhi Yojana and equity mutual funds, there is no one single investment that can be the best. Depending on the years to goal and your risk profile, diversify across all three of these investments. Make sure not to be heavily invested in debt products such as PPF or SSY and instead make use of the potential of equities through equity mutual funds over the long term.