There are many investment options that can help in meeting your children’s education goals. However, selecting the right investment scheme may not be easy. Instead of looking for the best investment scheme, it may be better to diversify across investment options to cater to children’s education needs.
Some investment options are exclusively designed for children’s education needs, while others, such as equity mutual funds, gold ETFs, etc can be used in an investment portfolio for the future benefits of children. Each scheme comes with unique features, structure, and may work differently. Therefore, knowing the details of each before making an investment is important to meet long-term goals such as children’s education.
How much to save for a child’s education
Before selecting the right investment plan for children’s education goals, it is important to conduct a basic research for evaluating the risk return parameters of an investment against specific objectives.
For instance, if the inflation rate is stable at 6% per year, an engineering course that costs Rs. 5 lakhs presently will cost around Rs. 12 lakhs after 15 years. In the absence of inflation, one needs to save only Rs. 1000 per month to fetch Rs. 5 lakhs after 15 years at an assumed annualised growth rate of 12%.
Considering inflation and at a growth rate of 12%, an individual has to save around Rs. 2,500 per month to achieve a goal of Rs. 12 lakhs after 15 years.
Mutual funds for children’s education goals
Young parents can consider investing in equity mutual fund investments for children’s education goals that are at least seven to eight years away. A sensible investment choice is to build a core portfolio that comprises consistently performing schemes, including large-cap and mid-cap funds. Some portion of investment can also be allocated to index funds.
There are also Solution Oriented mutual funds that invest with the aim to achieve a specific goal such as child’s education planning. This newly introduced concept in mutual funds has certain unique features, objectives, and strategies.
These are structured to specifically cater to financial planning of children’s education and other financial needs of children. These funds follow a unique strategy to accumulate corpus at a slow and steady pace till the time the child is young and spendings is low. As the child grows, and reaches a stage of education that demands higher expenses or any other financial assistance, the invested capital could be available for use. One should invest in these funds ideally before or right after the birth of the child to ensure appropriate planning and sufficient time.
There are mostly 2 different kinds of plans under this category, equity oriented and debt oriented. When the child is young or about to be born, the equity-oriented plans can be chosen to generate higher returns in the long term. The debt oriented plans are for those investors who have slightly older children about to complete their primary schooling.
It is important to create a separate portfolio for a child’s education goals while continuing to invest till approximately three years to achieve the goal.
Mutual funds can be broadly categorized into following:
- Equity – These funds invest majorly in equity and equity-related securities. Equity mutual funds are ideal for investors who have medium-high risk appetite and a longer investment horizon.
- Debt – These funds invest primarily in debt and money market instruments. Debt mutual funds are ideal for investors looking to generate higher returns with a low to medium risk involvement.
- Hybrid – Hybrid mutual funds are a combination of both equity and debt funds. These funds can either focus on equity investments or debt investments. Hybrid mutual funds are meant for investors who have a medium to high risk appetite and want to gain high returns in the medium-long term.
Sukanya Samriddhi Yojana (SSY )
Those who have a girl child below 10 years can invest in Sukanya Samriddhi Yojana (SSY). SSY is a government scheme and allows individuals to open a maximum of two accounts for two girls in the family. Sukanya Samriddhi Yojana account can be opened through a post office or a bank. One can make deposits into this account through electronic means, like e-transfer to the concerned post office or bank.
To open an SSY account, one must make a minimum initial deposit of Rs. 250. Thereafter, a minimum of Rs. 250 and a maximum of Rs. 1.5 lakhs can be deposited in the account every year. After opening an SSY account, one has to continue depositing in it for the initial 15 years. Thus, if the child’s current age is 6 years, the SSY scheme will mature when the child attains 27 years of age.
When the child turns 18, the parent can withdraw a maximum of 50% of the account balance in the preceding year for the child’s education. Final closure can also be done at any time before the child turns 21 years or gets married after attaining 18 years of age. For this, the parent has to file an application requesting premature closure for the purpose of education.
Public Provident Fund (PPF)
Investors who have a PPF account in their own name are allowed to open another account for their children. However, a maximum of Rs. 1.5 lakhs can be invested in it (parent plus minor account) per year. Apart from one’s own account, it is possible to open a PPF child account in the child’s name and contribute to both the accounts. The principal invested in PPF is eligible for deduction under Section 80C of the Income Tax Act, 1961, up to a maximum of Rs. 1.5 lakhs per financial year. Investment made in self and child’s accounts is eligible for tax benefits.
Child plan with waiver of premium (WOP)
To invest for children’s education needs, one can also consider specific life insurance plans with waiver of premium (WOP) rider or benefit. Waiver of Premium in a life insurance policy ensures that the policy does not terminate or turn inactive, even in case of death of the policyholder or inability of the policyholder to make premium payment. As part of the benefits, the insurer pays the sum assured and keeps adding the premium into the plan as per the due date. This ensures that the fund value is safe for use for the child’s education at a desired age.
Many parents prefer to save for their children’s education goals by investing in gold. However, a more cost-effective way to invest in gold is investment in gold exchange-traded funds (ETF). Gold ETFs represent paper gold and are similar to buying mutual fund units. The buying and selling of these units happens on a stock exchange (NSE or BSE) and gold is the underlying asset in these. One can also buy gold as low as 1 gram on a regular basis to accumulate the asset in the long term.
There are also sovereign gold bonds (SGB) issued by the government. SGB has a maturity period of eight years (lock-in ends from the 5th year). A gold ETF unit does not earn additional interest of 2.5% per annum that the SGB can earn.
Things to consider before investing for children’s education
For those who start planning early for children’s education, plain vanilla equity mutual funds and large cap funds can be an ideal choice. Here are some of key factors to note while designing an investment portfolio for children’s education-
- An investor should consider how long he/she plans to remain invested. For example, one needs to stay invested in equity funds for at least 5 years to fetch positive performance from the funds.
- Equity schemes that have potentially less volatility, such as a large cap or diversified schemes and hybrid schemes in place of a small cap fund, can be a good idea. Although small cap schemes offer higher chances of superior performance, they are prone to a higher degree of volatility when compared to large cap or diversified schemes.
- Mutual fund investments allow the flexibility to either invest through Systematic Investment Plan (SIP) or lump sum investments. Depending on specific financial goals and timelines, one can choose either of these options.
- When the redemption time approaches (in this case, when a child’s education needs arise), it might be a good idea to redeem equity investments in a systematic manner through a Systematic Withdrawal Plan (SWP).
Apart from investing in equity mutual funds, one can open a PPF account and buy Sukanya Samriddhi Yojana to cater to the child’s education goals. For gold investments, such as ETFs and SGB, it is important to consider factors, such as taxation and liquidity. It is equally important to continue saving irrespective of the market conditions and avoid diverting funds that are set aside for children’s education goals.
- How much does children’s education cost in India?
Considering the ongoing education fees, it may cost an average of Rs. 14 lakhs and upwards for a child’s education. This translates into Rs. 4.5 lakh required per year to fund a child’s education.
- Should I invest in direct plans or regular growth plans of mutual funds?
Direct plans of mutual funds generally have lower expense ratio as compared to regular growth plans. This helps direct plans in fetching higher returns.
- If investing in a mutual fund for my child’s education, is SIP better or lump-sum investment?
SIP mode of investment in mutual funds allows more financial discipline and regular investment. It also offers the benefit of rupee cost averaging, which is not possible in lump-sum investment.
- When should I start investing for my child’s education?
You must begin investing for your child’s education as early as possible. This allows a larger corpus accumulation in the long run.
- Is it good to invest in term deposits for a child’s education?
Term deposits like fixed deposits or recurring deposits are often preferred by risk-averse individuals to save for their children’s education needs. While these offer low liquidity, they are preferred because of their predictable returns.