How to Save for your child’s future?
When a child is born his/her parents starts planning for his/her future. You too must have thought of whether you would want your child to be a lawyer, doctor, or engineer. Today there is plethora of career options to choose from, and we encourage parents to allow their kids to choose from and follow the career option most suited to the child.
However career requires education, and just like everything else education comes with a price. Have you given a thought to how much you need to save for your child’s future education? Here’s a chart of cost of higher education as expected in future:
By 2030 a MBA degree will cost approx. Rs 67 lakhs! A child usually starts MBA at age of 21 – 22 years. So unless your kid is currently 6-7 years old already, this figure is irrelevant for you. If your kid is younger than 4 years then this chart does not cover his/her education cost.
Their education cost will shoot off the chart. By 2033 a MBA is already costing approx. 89 lakhs. How much do you think it will cost when your kid actually pursues it!!
Have you planned how you will save funds for your kid’s education? It’s a critical area that every parent needs to work on. While most other goals like house, car etc. can be delayed, children’s education cannot be delayed. So planning for it is essential.
There are numerous saving options which you can look into to save for your child’s future. Let us look at each of them:
Guaranteed Returns Options:
Returns are guaranteed and are consistent over period of time. This makes these option safer bet to invest in. Guaranteed nature reduces the amount of returns, but allow for investors to plan their goals in a stable manner.
- Child Plan – They come in many shapes and sizes, and are offered by all insurance companies in India. They charge high premium, and assure guaranteed return. On maturity of the child the money is paid out to him/her. Biggest advantage these plans offer is that, in case of death of policy holder, a lump sum amount is paid out to the survivor. Future premium are waived off and the insurance company continues to invest in the plan. On maturity the amount is paid to the child for whom the plan was taken. This protection that the policy offers in case of death of the account holder is what makes it so lucrative investment option for your child. This means that even in the unfortunate event of your death, your child’s future is protected. There are different plans some invest in debt market, some in equities, and some in mixed. Premium paid is eligible for deduction u/s 80C. Income from plan is tax free u/s 10(10d)
- Sukanya Saving Scheme – This is a Government operated scheme, launched in 2014. It offers interest rate of 9.2% currently. Since the scheme enjoys tax free status it is a popular investment option. But this scheme is not available for every child, as it is only open to girl child’s who are 10 years or younger. This scheme enjoys an EEE status, investment, interest and maturity sum are all tax free under this scheme.
- NSC/KVP – NSC are issued for 5 years, with 8.5% interest rate. These are one of the few investment options that a minor can purchase him/herself. KVP are issued for 100 months, during which amount invested is doubled. They can be enchased 2.5 year after purchase, so lock in period is 2.5 years only. Investment under both these schemes qualifies for rebate u/s 80C
- Bank FD – These are amongst the most tax inefficient option, since investment as well as interest earned on them is taxed. In case of Tax free 5 year FD, investment qualifies for rebate u/s 80C, but interest earned will still attract tax. They offer interest rate ranging from 8- 9% varying depending on amount invested, investment tenure and from bank to bank.
- Public Provident Fund – With 15 years lock in this is a good place to park your funds in. It currently offers interest rate of 8.7%. Account can be opened in banks or post office. It offers loan option making it a slightly lucrative offering for those seeking this option. Requires annual deposit. Interest is compounded annually. Investment as well as interest earned under this scheme is tax-free
Variable Returns Options:
Returns are not guaranteed and will vary from time to time. This makes this investment option, riskier but also more rewarding as they earn higher interest rate.
- Mutual funds – There are numerous mutual fund options in market. Every fund house offer plethora of schemes. Investor can purchase mutual fund unit as one time purchase, or can choose to purchase them monthly, via a Systematic investment plan. These schemes invest money in either debt or equities market or both to maximize earnings. Investor can choose scheme depending on risk appetite. On an average mutual funds offer 10-12% rate of return.
- Equity – Buying shares directly is best bet for those looking to invest in stock market. This requires prudent decision making and detailed studying of the companies whose share you choose to invest in. On an average in last 10 years, stock market has offered 16.5% rate of returns. This makes these by far the most monetarily lucrative investment option.
Where should you invest?
For short term goals, guaranteed return options are considered more prudent, whereas for long term goals, you should look to invest more in variable returns. If you have started soon enough and have a 15-17 years period to invest for your children’s education then dividing the investment 50-50 over both guaranteed and variable returns makes great sense.
For those who have a shorter investment period, guaranteed return plan are better option as the eliminate risk, however beating inflation with guaranteed returns plan is impossible. You need to invest at least 25% funds in variable returns plans so as maximize your returns. Also you need to maximize your investments to ensure sizeable savings for your child.