In view of the rising cost of living and education, it has become very important for parents to start saving early to obtain the financial future of their children. Just saving money in a bank account may not serve the purpose. Instead, parents should choose appropriate investment options to obtain the financial future of their children. It always helps to invest as early as possible to give your investment the time to grow and build up the required corpus.
But where to invest to meet the financial needs of children? FE Online talked to three industry experts regarding the five investment options for children. Here’s what they suggest:
Ajinkya Kulkarni, Co-Founder at Wint Wealth
1. Equity Mutual Funds: Education costs have been rising more by over 10% each year on an average. But it’s important to invest in such funds well in improvement as the time factor plays a meaningful role to sustain the adequate returns required for funding your child’s education.
2. Nasdaq 500 and Motilal s&p 500: I would recommend these international funds particularly for those looking at foreign university courses. These international funds have a dollar hedge, meaning your investment and returns will directly be in the dollar market. This will reduce the money lost during money conversion and one can comfortably use it oversea.
3. Fixed Maturity plans: If your horizon is close to around 3 years or less, this will be a good bet. Commonly known as FMPs, these Debt Bonds give higher returns than bank deposits in a medium risk ecosystem.
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4. Sovereign gold Bonds: SGBs are a good option as an education investment as they offer regular cash flow at 2.5 % interest rate to the child. Meanwhile, the complete principal amount will stay invested in the yellow metal which will have a good price appreciation and will be obtainable tax-free at the end of its tenure.
5. Sukanya Samriddhi Yojana: This is a recommendation particularly for parents of a young girl child. except an Education fund, this Government-backed saving scheme can also be alternatively utilized later during marriage if not required for bigger expenses like studying oversea. While it has a long tenure, it definitely gives higher returns than a PPF.
Kulkarni also said that in general, he would advise parents to avoid NPS and PPFs as an education investment option as the lock in tenure is very high.
Archit Gupta, Founder and CEO, Clear
1. Public Provident Fund (PPF) is a appropriate investment option for conservative investors. It has a 15 year lock-in period which forces you to stay invested for the long term. PPF currently offers an interest rate of 7.1% for the September to December 2021 quarter which is higher than bank FDs. additionally, you also get tax benefits on this investment.
2. National Savings Certificate (NSC) currently offers an interest rate of 6.8%. It qualifies for the Section 80C tax deduction and offers higher post-tax returns than bank FDs.
3. Solution-oriented mutual fund schemes invest in a mix of equity and fixed-income securities. It has a lock-in period of 5 years and is appropriate to build up a corpus for children’s education.
4. Equity mutual funds are appropriate for aggressive investors as they invest predominantly in stocks. However, they can offer inflation-beating returns over time and help you reach long term financial goals. additionally, investing by the methodic investment plan (SIP) helps you invest small amounts regularly in these funds to build up the required corpus over time.
5. Debt Funds invest predominantly in fixed income securities such as government securities and treasury bills. It offers returns similar to bank FDs and is appropriate for your child’s future recurring expenses such as school fees.
Anurag Garg, Founder and CEO, Nivesh.com
1. Equity Mutual Funds: Due to the investment horizon being a long-term one (as investments are for a child), an individual can opt to build a corpus for their child and his/her future needs via methodic investments (SIPs) in equity mutual funds. Equity mutual funds are known to generate returns in the long run. Furthermore, by methodic investments an investor can assistance from rupee cost averaging because every month the cost of the investment will change; it can go up in some months and reduce in some months.
If one invests say Rs. 10,000 each month for 15 years, a corpus of approximately Rs. 50.45 Lakhs assuming 12% return by this period of 15 years. Another advantage is that SIPs can be started at as low as Rs. 500 per month. Hence the investor can choose the investment amount as per his/her financial capability and requirements. However, it must be noted that equity mutual funds are unprotected to market risks and there is no guarantee of what returns one will be able to get.
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2. Gold Mutual Funds or Gold ETF: This is a good investment option for investors who are concerned about inflation rates in the long run. Not only does an investment in gold act as a hedge against inflation but Gold Mutual Funds/ ETFs also remove the cost of holding physical gold. With such funds impurity risks are also reduced. If one invests say Rs. 10,000 each month for 15 years, a corpus of approximately Rs. 31.88 Lakhs assuming 7% return on a total investment of Rs. 18 Lakhs
3. Conservative Hybrid Funds: Hybrid funds are those in which investments are made in both debt and equity asset classes. Conservative Hybrid Funds are those which have an allocation of 65% or more towards debt or debt-related instruments. If one invests say Rs. 10,000 each month for 15 years, a corpus of approximately Rs. 38.12 Lakhs assuming 9% return on a total investment of Rs. 18 Lakhs
4. Corporate Bonds: A corporate bond is a debt obligation. Investors who buy corporate bonds are lending money to the company issuing the bond. In return, the company makes a legal commitment to pay interest on the principal and, in most situations, to return the principal when the bond comes due, or matures.
However, one must be aware that credit risk is associated with bonds. Credit risks are calculated based on the borrower’s overall ability to repay a loan according to its original terms. If one invests 18 Lakhs in a corporate bond, a corpus of approximately Rs. 65.56 Lakhs can be accumulated in 15 years assuming a 9% coupon rate.
5. Corporate Fixed place: For an investor who is conservative in character, has a lumpsum amount and wishes to build a corpus for their child this is a good option. However, with a fixed place, one must put in a lumpsum amount in one go as they do not allow for monthly installments.
As compared to Equity Mutual Funds, FDs earn a lower rate of return and once inflation is accounted for the real rate of return is further reduced. If an investor invests the same Rs. 18 Lakhs in an FD, a corpus of Rs. 37.92 Lakhs can be accumulated in 15 years assuming 5% return.
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