For every parent, having a child is a ‘Blessing’. It brings a moment of joy for not only them but all the people around them. However, with this happiness they also undergo a lot of changes. One of the major changes that occur is the financial responsibility which also determines their future savings behavior. Planning to provide the best of the education facility becomes primary objective for a parent for which they are ready to compromise their lifestyle too.
However, the ever rising education cost and cost of other related stuff has enabled them to start saving for their child’s future as soon as possible. But the main problem comes when they have to choose the best option amongst the numerous investment avenues available in the market. Understanding the profitability of the instrument, the credit worthiness and the risk taken by the investor is another barrier which comes during the planning phase.
Planning for children’s future is a long term investment decision and hence requires a lot of research and due diligence before initiating it. The investor also wants to make sure that the hard earned money which is invested will be sufficient to fulfill their child’s future requirement.
When it comes to choosing an investment option the market provides limitless options which often confuses an investor rather than convincing them. Here, we make an attempt to understand some investment option available for the long term investment with their benefits and limitation which would help the parents take a sound financial decision.
- Term Deposits and Recurring Deposits
Term deposits (Fixed Deposits) and Recurring deposits are one of the most popular traditional methods of investing. They are offered by banks, post office and private financial companies. They are time bound i.e they have a maturity period and carry a pre-determined rate of interest. The maturity period ranges from as low as 6 months to a maximum of 10 years. They offer pretax returns which are slightly above the inflation rate. However, after considering taxes the returns would be lower. A lot of investors treat it as an avenue to park their excess money as they provide better returns than the savings account.
The Recurring deposits have similar features like a fixed deposit except that the investment can be made on a regular period. They serve as important tool for the investors seeking to invest regular monthly savings.
Returns range – 8.5% to 9.5%
Pros –
a) Fixed returns
b) Safety of the investment as they are insured by the banks.
Cons –
a) Post tax returns may be lower than the inflation
b) Attracts pre-closure penalties if withdrawal done before the maturity period.
2) Public Provident Fund ( PPF account)
PPF account is a voluntary provident fund account which is offered in banks. Just like FD’s and RD’s they also have a pre-determined rate of interests. The maturity period is fixed at 15 years with an option to extend by a block of 5 years. It also provides an additional benefit of taxation as the contribution can be claimed under 80C and maturity amount are tax free. The minimum one could contribute is Rs 500 per annum and the maximum limit is Rs 1.5 lacs. PPF are suitable for long term investments as the investors can avail returns above inflation rate and the investments are very much secure. A PPF investment if initiated at an early stage of the child’s life would provide the maturity amount at the right time to fulfill the education requirement. Hence the timing if the investment is very important.
Returns – 8.7%
Pros
a) Tax free returns above inflation
b) Option to extend the maturity period
c) Tax deduction can be availed
Cons
a) Fixed returns does not allow to reap future market benefits
b) Withdrawals are not possible before the 7th year
c) Investments are limited to Rs 1.5 lacs per annum.
Looking at the market opportunities, the life insurance companies also stepped into the race of providing avenues by introducing plans specifically designed for children. These plans are mostly in form of money back plans which provides periodical payments at important stages of children’s life. These money back period generally occurs during the period where a child would require higher education. The premiums paid for these plans are fixed as per the investor’s requirement and provides tax benefits under 80C.The returns varies from plan to plan as each plan have its distinct features. They also provide life insurance coverage with the investment benefits. The maturity proceeds are tax free.
Returns range – 5% – 7%
Pros –
a) Provides periodical payouts at important years.
b) Tax benefit can be availed though deductions and maturity proceeds are tax free
c) Provides life insurance coverage
Cons
a) Returns are low.
b) Life insurance coverage is inadequate.
c) Strict withdrawal rules. Premium paid cannot be recovered totally if plan discontinued.
4. Mutual fund investments
Since the last decade or so, the stock markets experienced a flourish in the investments which encourage investors to invest more in mutual funds. The markets regulators also provided ample convenience to facilitate the investments which resulted into higher domestic participation in market. The mutual funds provide exposure to almost every sector of Indian markets. Moreover the efficient fund management also makes it a high return generating option. The mutual fund investments allow investor to earn higher returns and take risk suitable for them which is unlike other fixed income instruments. The multiple sectors help in proper diversification to minimize the market risk. The returns for a long term investment can range from 12% to 18% per annum. Although there is no such upper or lower limits of returns, but the historical data shows similar returns in the past. The main advantage of mutual fund investments is the ease of investment they provide. An investor can choose to invest in any form as per their convenience. There is no limit to the investments and the periodical or fixed investments options are always available.
Returns Range – 12%-18% (Based on risk profile) for long term. Although they are not guaranteed returns
Pros
a) Provides opportunities for higher returns
b) Liquidity and flexibility as the investments can be made in any form.
c) Provides investment opportunities for all risk kind
d) A perfect tool to diversify the investments
Cons
a) Returns are not assured as market risk can depreciate the investments
b) Some mutual funds are taxable
5. Real Estate Investment
Real estate belongs to a fixed asset category. It has also emerged as a popular investment tool due to positive growth prospects in the country. People tend to buy a property (Agricultural, Commercial and Residential) for a longer term with an aim of selling it off when the need arises. They are also a source of regular income through rent and leases. The letting out of property provides an opportunity to provide inflation adjusted returns as the rents increases every year.
Returns Range – 10%-12% (not considering the regular income if applicable)
Pros
a) Regular income is inflation adjusted due to periodical increments in rentals.
b) Source of capital appreciation
c) The property can be used for personal purposes.
Cons
a) Involves heavy cost during the acquisition
b) Legal procedures are needed to be complied and regular cost in indulged.
c) Lacks liquidity
Conclusion
Although the entire investment avenues aims at providing returns in future, but the selection depends largely on the individual requirement of future amount, risk appetite and the amount available for investment. One should be careful while selecting the right investment option as some of them may not be liquid in nature and hence any change to be made in the future may get hampered. Investor should also be aware of the risk part of the investment as nobody wants their hard earned money to deplete instead of wealth creation. But the most important aspect to consider while planning for your child’s education is to identify how much amount they need at appropriate life junctions.
| Investment Option | Returns | Taxation | Post Tax Returns |
|---|---|---|---|
| Fixed Deposits / RD | 8.5% to 9.5% | As per income slab | 6%-6.5%** |
| Public Provident Fund | 8.70% | Tax Free | 8.70% |
| Child Plans | 5%-7%* | Tax Free | 5%-7% |
| Mutual Funds | 12%-18%* | Equity Funds are tax free. Rest are taxable under capital gain | 12%-18% |
| Real Estate | 10%-12%* | Taxable as capital gain | 8%-10% |
*Returns based on historical performances
**Tax slab taken as 30%.
| Investment Option | Investment amount | Mode of investment | Time period of investment | Post Tax Returns | Future Value ( Post Tax) |
|---|---|---|---|---|---|
| FD | 1800000 | One time | 15 | 6.50% | 4,629,314 |
| RD | 10000 | Monthly | 15 | 6.50% | 3,035,448 |
| PPF | 120000 | Per annum | 15 | 8.70% | 3,441,335 |
| Child Plans | 120000 | Per annum | 15 | 6% | 2,960,703 |
| Mutual Funds | 10000 | Monthly | 15 | 12% | 5,045,760 |
| Real Estate | 1800000 | Per annum | 15 | 9% | 6,556,468 |
Considerations:
a.Amounts considered as per Rs. 10,000 per month for all investment options
b.Investments start when the child is 3 years old, and considering an education corpus is needed on the 18th year of the child (typically when he passes out his Intermediate and is about to seek admission into a professional graduation course).
Written By Arthayantra
