Many parents these days look at the Unit Linked Insurance Plans and children saving plans that insurance companies and fund houses tend to provide. They do provide insurance and some sort of safety comfort for your child's education, but, the returns are poor. In fact, if you deduct the expense associated with these child's plans your returns are reduced.
If you want to secure your child's education, expenses in case of your sudden demise go for a plain vanilla term insurance plan that will take care of everything. Following the insurance you can look at the following options to build a solid corpus for your child's education. Here are a few great child investment saving plans.
This is the best scheme to invest for a number of reasons. It is a 15-year scheme where you can build a corpus for your child's education. The current interest rate of 8 per cent by far beats interest rates of banks, which are at 7.5 per cent.
With the RBI hiking interest rates and bond yield rising, it is hoped that the government would revise the interest rates from the coming quarters.
The interest earned is tax free in the hands of investors. Apart from this you get a tax rebate of upto Rs 1.5 lakhs under Sec 80C of the Income Tax Act.
PPF can be extended beyond the 15 years in blocks of five years and there is no limit on the number of blocks which can be extended. Another distinguished feature of this plan is the PPF account can be retained with or without making any further contribution and the corpus will continue to earn interest until the account is closed.
If the PPF account holders, decide to continue with their contribution post maturity, then they will have to submit Form H within a period of one year from the date of maturity period. If in case, the PPF account holder, fails to do so, then fresh deposits made to the PPF account will not fetch any interest added to this the fresh deposits into the account will also not be eligible for deduction under Section 80C of the Income Tax Act of 1961.
Form H is a simple one page form which can be downloaded either from the web portals of banks and India Post. The account holder will have to submit the duly filled in form either at the bank or post office wherever the account is held.
Post extension of the PPF account, the subscriber will be eligible for making one partial withdrawal every year but the total withdrawals during the five year extended block period should not exceed 60% of the account balance at the beginning of the five - year period.
All in all this makes it a very attractive scheme to invest. This is probably one of the best ways to build a child plan corpus. Only the larger lock-in period is the only worry, but, that in turn helps you to build a corpus. Go for this as they are more tax efficient as well. Safety is a big assurance as far as the PPF is concerned.
State Bank of India
SBI Life Smart Scholar:
It is a non-participating ULIP(Unit-Linked Insurance) Plan. This plan provides double protection for your family, in case you are not there. The payment of the basic sum is insured and an integrated premium or an integrated withdrawal indemnity guarantee the continuation of your policy.
This plan also offers two advantages: Market-related rent and insurance. The minimum age for entry is 0 years and the maximum age is 17 years. The tax deduction under section 80C of the Income Tax Act is available for the Smart Scholar plan. In addition, in the event of unfortunate death, a lump sum benefit equal to the greater of the sum insured or 105% of all premiums paid up to the date of death will be payable.
SBI Smart Champ Insurance Plan:
The SBI Smart Champ Insurance Plan is an unbound participating individual life insurance plan designed to protect your child's future educational needs. It provided benefits that are payable during the term of the policy and provides insurance coverage to the applicant. He would be insured for life and to the policyholder in the event of death and accidental total permanent disability for the term plan.
In addition, smart benefits are payable in four equal installments after the child turns 18 years of age.
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 8.5 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.
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 more 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.
Equity mutual funds
Everybody often goes gung-ho with equity mutual funds to generate wealth for children. However, this has some risks. The problem is one is not sure at the time of redemption or if your child needs the money, how the markets would be.
For example, if you want to redeem all your units in 2030 to meet a child need you are not sure if the markets would be buoyant at that time.
However, many equity mutual funds have beaten returns from even bank deposits and have given sizeable returns.
So, if you are a long term investor, these tend to give you returns like no other. If you are planning to save money for your children's education or other such plans, look no further then equity mutual funds.
The income distributed by equity mutual funds would now be subject to tax, so your overall returns could reduce. So, one as to be really careful before choosing equity mutual funds.
Be warned that these are risky and there is no certainty that at the time you want to redeem the markets would be high. A slightly more risky child investment plan to consider.
Debt mutual funds
Some debt mutual funds offer better returns than bank deposits. They are also more tax efficient than bank deposits, which makes them a better choice.
However, you need to opt for the safe child plans more than anything else. Go for them if you are planning a very long term investment, given the fact that they give better returns in the more long term. Again, you may need some professional advise here, given the fact that some of these schemes could be a little risky.
Go for debt mutual funds that are heavily tilted towards AAA securities. This would provide you some respite in case markets fall. Gilt edged funds, which invest most of the money in government security may also be good a bet.
Returns from debt mutual funds would largely be in line with interest rates in the economy, which are now offering between 7.5 to 8 per cent.
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 PNB Finance Company FD, which is offering an interest rate of 8.25 per cent on its 10-year deposit, against banks which are offering a rate of just 6 7 per cent.The yield on these deposits works to a cool 12.09 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 a tenure of 10-years and above.
In any case, the PNB Housing Finance FD is a safe one to invest for 10 years to build a corpus for your child.
The best child plan options would be the Sukanya Samridhi and the PPF. They offer the best interest rate and the interest rates are tax free in the hands of the investors.
Now, while there are many child investment plans that we have mentioned you need to check the one that suits you the best. That would be based on your own ability to save and the tenure.
For example, if your child is small and you are looking at a very long term tenure of say 15 years, the PPF would be the best bet. On the other hand, if you are looking at slightly smaller tenures you would do well to look at some deposits like the PNB Housing Finance Deposit which has a duration of upto 10 years. The most important thing also is to look and consider the tax liability.
Some of the Child Investment schemes we have suggested have no tax liability and also offer you tax benefit under Sec 80C of the Income Tax Act. So, decide accordingly. Remember, once you have invested in a particular scheme it would be extremely difficult to come out and invest in a new one altogether.
Why you should go for child investment plans?
Parents in India are always concerned about their child's education and money required for marriage of their children.
Parents will think about their children on how to do investment panning on their children and how to give security to their future even in their absence. Early planning can help. When investing in child plans there are three things that you should consider.
The first and foremost is safety, the second is the returns and the last is the tax liability that may arise from such an investment. Of course, safety of the investment is paramount and the other two points can follow. Remember to start investing early and also regularly to build a decent corpus for your child.
The last point we would like to make is that the Child Investment Plans suggested by mutual funds are not necessarily the best, because they offer poor returns.
We want to mention here again, go for a decent term plan and then build a child investment corpus through the Public Provident Fund, Sunkanya Samriddhi etc., as they are highly tax efficient.
Always remember before investing to keep in mind the tax liability that may arise. Lastly, be careful with the plans as safety should be your utmost priority.
It's also important to remember with regards to child investment plans that there are some investments, where you can almost calculate your returns. However, in the case of mutual funds, you are unsure, what the returns would be. We suggest that you seek professional advise before investing.
Disclaimer: This article is strictly for informational purposes only. It is not a solicitation to buy, sell in securities or other financial instruments. Greynium Information Technologies Pvt Ltd, its subsidiaries, associates and the author of this article do not accept culpability for losses and/or damages arising based on information in this article.