14 Investment Options for Your Child’s Better Future
Public Provident Fund (PPF)The PPF account or Public Provident Fund scheme is one of the most popular long-term saving-cum-investment products, mainly due to its combination of safety, returns and tax savings. The PPF was first offered to the public in the year 1968 by the Finance Ministry’s National Savings Institute. Since then it has emerged as a powerful tool to create long-term wealth for investors. Investors use the PPF as a tool to build a corpus for their retirement by putting aside sums of money regularly, over long periods of time (PPF has a 15-year maturity, and the facility to extend the tenure). With its attractive interest rates and tax benefits, the PPF is a big favorite with a small saver.
Why is the PPF so popular?The PPF is popular because it is one of the safest investment products. i.e., the government of India guarantees your investments in the fund. The interest rate is set by the government every quarter. PPF scores over many other investment options mainly because your investment is tax exempt under section 80C of the Income Tax Act (ITA) and the returns from PPF are also not taxable.
Features of PPF accounts
- You can invest a minimum of Rs. 500 and a maximum of Rs. 1, 50,000 in a financial year.
- A PPF has a minimum tenure of 15 years. You can extend it in blocks of 5 years if you wish.
- Any Indian citizen can open a PPF account.
- You can take a loan on your PPF account between the 3rd and 5th year and make partial withdrawals after the 7th year for emergencies only.
- You can open a PPF account with just Rs. 100 with any recognized You can make deposits every month or in a lump sum through cash, cheque, DD or online transfer.
- The PPF accounts cannot be held jointly, though you can make a nomination.
- You must compulsorily make a minimum deposit of Rs. 500 every year.
- The government of India’s guarantee and unmatched tax benefits make a PPF account one of the safest, attractive and popular long-term investments available.
Sukanya Samriddhi Yojana (SSY)The SSY plan is specially designed to encourage you to save for your daughter. An SSY account can be opened any time after the birth of your daughter till she turns 10. Some features of the Sukanya Samriddhi Yojana are:
- The account is opened in the name of the girl by her parents/legal guardians.
- Multiple accounts for the same girl are prohibited.
- The interest rate for SSY is 6.9% p.a. but is subject to change.
- A family can have only two SSY accounts, which means one for each daughter. If the firstborns are twins/triplets, no additional account can be opened if the second birth results in a girl child. If the first birth results in triplets (girls) or second birth results in twin girls, then three accounts can be opened by the family.
- The minimum investment amount is Rs. 1000; the maximum amount is Rs. 1, 50,000 annually.
- The SSY account matures when the girl turns 21.
- SSY scheme has the EEE (exempt, exempt, exempt) tax feature under Section 80C and offers risk-free fixed returns. EEE feature means that the initial investment is eligible for a tax deduction, returns are not taxed, and the maturity amount is also not taxed.
Post Office Term Deposit (POTD)Another valuable option for your girl’s future planning is the Post Office Term Deposit. This post office saving scheme allows you to open an account in post offices across the country. The features are:
- The lock-in period for the scheme is 5 years.
- POTD can be transferred anywhere within the country.
- Depending on the tenure you choose, a POTD offers interest between 5.5% and 6.7%. The rates are subject to change.
- POTD can be opened for your child who is above 10 years.
- The minimum deposit amount is Rs 1,000; there is no maximum limit.
- Interest earned on this scheme is added to your total annual income in the year of receipt and is taxed as per the tax rate applicable to your slab. However, POTD with a 5-yr tenure is eligible for tax benefits under Section 80C of the Income Tax Act.
Post Office Recurring Deposit (PORD)One of the post office savings schemes that allow saving small amounts every month is the PORD. You can save as little as Rs. 100 per month. Some features of the scheme are:
- The interest rate is subject to change from time to time. Currently, a 5-yr PORD offers interest at 5.8% p.a. compounded quarterly.
- The post office recurring deposit scheme has a medium-term length of 5 years and can be extended after that.
- It can be opened for your daughter/s above the age of ten with you as the guardian.
- The PORD scheme is a good option if you are looking at a disciplined way of investment. It is a risk-free investment backed by the government.
National Savings Certificate (NSC)NSC is another popular post office savings scheme. Some of its features are:
- Tenure is 5 years.
- The minimum deposit is Rs. 1,000 with no maximum limit.
- Currently, interest is paid at 5.9% p.a., which is subject to change with time.
- Tax benefits under Section 80C, risk-free returns, and transferability are the chief advantages of NSCs.
Children Gift Mutual FundDesigned for accumulating a sizable corpus for milestones in your daughter’s life, children’s mutual funds offer many advantages. The features are listed below:
- Children’s Gift Funds are hybrid or balanced funds that invest in a combination of equity and debt instruments.
- The funds are locked in till your child turns 18.
- Children funds create long-term appreciations and allow you to invest in a combination of debt instruments and equity stocks as per your choice.
Equity Mutual FundsEverybody 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 when 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’s 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.
Debt Mutual FundsSome 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 advice 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.
Systematic Investment Plan (SIP)A systematic investment plan offers you an option to invest the desired amount every month in a mutual fund of your choice to save for your child’s future. The features of a SIP are:
- Each month a predefined amount is deducted from your account towards the investment.
- You can invest in different SIPs simultaneously.
- Can start with as lows as Rs 500 per month.
- Depending on your goals, you could invest in equity, debt, or mixed funds.
- SIPs offer advantages like the power of compounding, and rupee cost averaging and better returns in the long run when compared to a recurring deposit.
Gold ETFsGold has been traditionally a preferred choice for investing for girls. In current times, instead of investing in physical gold, you can invest in gold ETFs.
- Gold ETF, just like a mutual fund, can be bought online.
- One gold ETF unit is equal to one gram of gold.
- Gold ETFs are open-ended; you can enter and exit as per your choice.
- Unlike investing in physical gold, investing in Gold ETF does not come with safety and storage hassles. You can invest small amounts too in Gold ETFs. They help in diversifying your portfolio.
Unit Linked Insurance Plans (ULIP)ULIPs combine life insurance with investment. A part of the premium paid goes towards insurance; the remaining is invested in equity. Child ULIPs offer triple benefits
- If the parent dies, the family receives a regular monthly payout for paying the child’s fee. For all you parents who have ambitious young children with stars in their eyes, here are a few options that can help you save for their bright future.
- They also receive death benefits for meeting daily expenses.
- The insurer pays future premiums.
- Continuity in investment when the parent is not there is the main advantage of this option.
Money Back PolicyAs the name suggests, a money back policy is a policy which gives money back at regular intervals. This money back is paid during the plan tenure and is a percentage of the Sum Assured. Money back payouts are called Survival Benefits. These benefits are paid during the plan tenure and on maturity, the remaining Sum Assured is paid along with vested bonuses. However, if the insured dies during the plan tenure, the full Sum Assured is paid irrespective of the Survival Benefits already paid. This is what makes the plan unique. Some of the salient features of the Money Back Policy are:
- The Survival Benefits are calculated as a percentage of the sum assured.
- Survival Benefits are paid at regular intervals during the plan tenure. There is a fixed interval when the benefits would be paid. Every plan has a different payout structure. Similarly, the percentage of Sum Assured paid as Survival Benefits is also not fixed and varies between different plans.
- If the plan matures, the remaining portion of the Sum Assured (actual Sum Assured less the Survival Benefits already paid) is paid as maturity benefit. However, in case of death, the entire Sum Assured is paid irrespective of the money-back benefits already paid.
- Money back plans usually come as participating plans where bonuses are added. The accrued bonus is then paid on maturity or on death.
- Riders are also available under many money back plans. Rider benefits are paid as a lump sum only when the contingency covered by the rider occurs during the plan tenure.
Fixed DepositFixed deposits are the vanilla ice cream of the investment world. You can open an FD for your child in any bank or NBFC. The features of FDs are:
- FD investment can be started with just Rs 1,000.
- Generally, the term varies from a few months to 10 years.
- Flexibility to get interest payout at maturity, monthly, quarterly, and annually.
- Benefits of investing in FDs include flexibility, safety, and liquidity.
Kisan Vikas PatraKisan Vikas Patra, popularly known as KVP, is a small savings scheme that is offered in the form of certificates in Indian Post Offices. This savings plan is a fixed-rate savings plan that aims to increase your money once a set length of time has passed that is during 124 months (10 years and 4 months). The account can be opened by any adult or on behalf of a minor. Moreover, a minor who is above the age of 10 can have an account in his own name. Three individuals together can open a joint account too.
Interest rateInterest rate for the quarter ending June 30, 2022 is 6.9 % which is compounded annually.
How much investment can be made?There is no upper limit and the minimum is Rs. 1000 in multiples of Rs. 100. One can open any number of accounts.
KVP can be pledged and transferredKVP can be pledged or transferred as security by submitting a regulated application form, along with a pledgee’s acceptance letter.
Transfer/pledging can be made to the following authorities.
- The President of India/Governor of the State.
- RBI/Scheduled Bank/Co-operative Society/Co-operative Bank.
- Corporation (public/private)/Govt. Company/Local Authority.
- Housing finance company.
KVP premature closureKVP may be closed before maturity at any time if the following requirements are met: –
- When a single account, or any or all of the account holders in a joint account, passes away.
- On forfeiture by a pledgee being a Gazette officer.
- When ordered by court.
- After 2 years and 6 months from the date of deposit.
- Transfer of account from one person to another person
Tax benefitsThe scheme is not eligible for tax deductions under Section 80C of the Internal Revenue Code, and the returns are fully taxable. Nonetheless, withdrawals after the maturity period are exempt from TDS (Tax Deducted at Source). To transfer from one person to another person, the following are the criteria according to Post Office:
- On the death of account holder to nominee/legal heirs.
- On the death of account holder to joint holder(s).
- On order by the court.
Tips you must consider while making an investment for your children
- The early you start with savings and investments, the more time you will have to build a corpus for them. Your savings will also get sufficient time to grow. The emergency corpus is important for any medical and non-medical emergency. It should have funds equal to nine to one-year household expenses. This fund will be very useful in case of job loss, medical emergencies. You can rely on this fund without disturbing your other investments.
- During this whole process, discipline is very important. You need to have patience while investing for long-term goals. A sustained approach and meticulous planning are very important while building a corpus. In order to attain consistency with your investment, you can opt for a systematic investment plan (SIP).
- Open savings account for your kids, to teach them the basics of banking and money. Once he or she turns 10 or above, your child can operate his or her account, explain to them the basics of bank deposits and withdrawals.
- Besides taking care of your child’s material comfort, invest in their health and wellbeing. It may be noted that the immunity of children is lower as compared to adults and they are more susceptible to diseases. There are some health insurance especially designed for kids which offers a host of benefits such as lower premiums, tax benefits, discounts, add-on covers, etc. They also offer a number of plans for kids, covering every stage of their growth, with tailor-made plans for a particular stage.
- Always review your investment portfolio from time to time. And if some fund is not performing well, do not hesitate to replace it with a good performing fund. Ideally, rebalance your portfolio every six to nine months. Time to time, our needs and requirements change and keeping that in mind rejig your portfolio.
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