Saving is an intrinsic part of Indian society. But seldom do we realize that educational costs are skyrocketing. The cost of education has outpaced inflation consistently during the past decade. By the time your little one reaches college, your pockets are going to be empty unless you start planning now.
When you decide to have a child, you should start planning for their future. If you start investing from the beginning, you can build a healthy nest egg for your young one. Let us look at the investment opportunities that can help you achieve your goal.
How do I start saving for a new baby?
Although it's hard to imagine your child all grown up even before its birth, you have to think ahead. The fact that tuition fees are increasing twice as fast as inflation should raise concerns. A habit of saving and investing regularly can help you successfully reach the crucial milestones in your child's life.
Here is the list of seven investments that can give momentum to your young one’s career.
Indian society traditionally accepts fixed deposits as safe investments. The DICGC provides an insurance cover of INR 5 lac for bank FDs. You are allowed to invest a fixed amount for a fixed tenure at predefined interest rates. You also earn compound interest on your FD investments. This is because the interest earned is reinvested.
Though every bank or NBFC has its fixed deposit scheme, the maximum interest cannot exceed the term deposit range set by the RBI. Before selecting a fixed deposit plan, you must use a fixed deposit calculator to know your return on investment. Online websites help you compare different fixed deposit schemes and choose the highest interest rate fixed deposit. Here is a list of the different types of FDs.
- General Fixed Deposits: You can deposit your money for a fixed term. These deposits can be for 7 days to 10 years. These FDs provide a higher interest as compared to regular savings accounts.
- Tax Saving FDs: Section 80C of the Income Tax Act allows a deduction of up to INR 1.5 lacs depending on the amount you invest. These have a minimum lock-in period of 5 years.
- Flexi FDs: These FDs are based on an auto-sweep facility. You are asked to set a savings account limit. If your savings account balance crosses the limit, an FD is created.
- Fixed Deposit for minors: The banks in India allow the parents or guardians of a minor to invest in FDs on his/her behalf. They are allowed to withdraw these FDs once they reach 18 years of age.
Public Provident Fund (PPF)
This is a very popular investment product in India. You can invest in PPF through post offices and banks. A person can hold only one PPF account in his name. There are many benefits of investing in a PPF account including higher interest earnings compared to FDs. Let’s have a look at them:
- Long-Term: The minimum tenure of a PPF investment is 15 years. You can then extend it for 5 years at a time. If you invest in a PPF account as soon as your child is born, you can build a huge corpus over 15-20 years. This can help you sponsor their higher education by the time they become an adult.
- Section 80C deduction: You can claim a deduction of up to INR 1.5 lacs from your taxable income every year by investing in PPF. The minimum investment every year is INR 500. This is a mandatory amount.
- Higher interest: PPF is considered one of the best saving schemes because it is risk-free and offers more interest than FDs. Currently, you can earn 7.06%*p.a. on your PPF investments. You also enjoy the compounding effect on your PPF account.
- No tax on the maturity amount:PPF withdrawals do not attract any tax, either on the deposited amounts or on the interest earned.
- Easy loan availability:Between the 3rd and 6th year, you can avail of easy loans against the PPF balance at only 1%. This loan can be for 36 months.
- Withdrawal from the PPF account: You can withdraw 50% of the balance after 5 years.
Sukanya Samridhi Yojana
Sukanya Samridhi Yojana was launched in 2015 under the “Beti Bachao, Beti Padhao” scheme. This scheme aims to save the girl child and provide the best education to her. It can prove to be a game-changer for your girl child. Here are the key features of this amazing product.
- Long-term: You can open this account when your girl child is between 0-10 years. The deposits under the SSY are for 21 years, but you are allowed to withdraw up to 50% of the balance for marriage or higher education once she attains the age of 18 years.
- Section 80C deduction: You can claim a deduction of up to INR 1.5 lacs every year from your taxable income. The minimum investment every year is INR 500. This is a mandatory amount.
- Higher interest: An SSY account provides an annual return of 7.06%*p.a., along with compounded benefits. This makes it an attractive investment proposition.
- Withdrawal by the girl child: The maturity amount is paid only to the girl child. This ensures that the amount reaches the right hands.
- No tax on maturity amount: No tax is charged on any withdrawal or the maturity amount of the SSY account.
- Premature withdrawal: 50% of the balance is allowed to be withdrawn for marriage or higher education once the girl reaches 18 years of age.
Mutual Funds pool the investor’s money and invest it in different stock market instruments. The fund houses employ specialized fund managers to handle the investment portfolio. Their role is to minimize the risk and increase your returns. Equity Linked Savings Scheme (ELSS) is the most popular Mutual Fund scheme as it provides the highest returns. Here are some features of ELSS:
- 65% equity: These funds focus more on equity investments. So, more than 65% of their corpus is invested in the equity markets.
- Section 80C deduction: A deduction of up to INR 1.5 lacs is allowed from your taxable income depending on your investment amount.
- Lock-in: You cannot withdraw your investment during the minimum lock-in period of 3 years.
- Higher returns: Historically, ELSS funds have outperformed the stock markets. This is because the portfolio is actively managed.
- Taxes: Since ELSS investments are for the long term, earnings up to INR 1 lac are exempt from tax. The gains beyond INR 1 lac are taxable at 10%.
ULIPs (Unit Linked Insurance Plans)
ULIPs are a hybrid combination of Insurance and Mutual Funds. A part of your premium is invested in Mutual Funds, and another part is used as a premium for life insurance. Your life cover can vary from 10-40 times the premium, depending on the insurer. Advantages of ULIPs are:
1. You choose the life cover: You have the freedom to choose a life cover of your interest.
2. You choose your investment type: You have the freedom to choose between equity funds, debt funds, or hybrid funds.
3. Partial withdrawals: You are allowed to make partial withdrawals before the policy expiry date for purposes like education fees, marriage, vacations, emergencies, etc.
4. Tax benefits: You get a deduction under Section 80C up to INR 1.5 lacs per annum. The maturity amount is also free from any tax.
5. Lock-in period: Your ULIP investments are locked in for a minimum of 5 years.
Health is wealth. With the incidence of Covid-19, this is one thing that needs to be given more importance. Purchasing a health insurance policy for yourself and your young one can save you from future uncertainties. Hospital bills are enough to drain all the savings of a family. Health insurance can save you from spending your hard-earned money that can be used to educate your children.
Investment for future savings is as important as timing them. Plan for the future of your baby well in advance to ensure bright career opportunities for your child. Click here to choose the best investment scheme and start investing.