Tax-efficient investments that will secure your child’s future

Saving money for your child’s future is one of the important financial goals of a parent. To make your child’s dream come true, your money must grow with your children. That is why your investment decisions should be made with the utmost care and research and not on ad-hoc planning. 

Before you start investing, you should identify and estimate your child’s financial needs at different stages of their life. Once you have a clear understanding of how much and when the money will be required, it will be easy for you to choose the apt investment avenue and start investing. Also, the planning will help you avoid making hasty financial decisions. 

For instance, any graduation course in India that costs Rs 7-10 lakh presently will cost around Rs 17 lakh after 16 years, assuming the inflation rate of 6% per year. So, at a growth rate of 15%, you need to put aside Rs 4,000 per month to fulfil that goal. 

Many parents are confused as to how they should go ahead with investing money in some efficient investment avenues. If you too, as a parent, are in a fix as to where to park your hard-earned money, here are some popular financial products you can consider for your children’s bright future. 

1. Public Provident Fund (PPF)

Among the various investment options available in the market, PPF is the most preferred one. It is a long-term investment tool with a lock-in period of 15 years. You can open an account in the name of your minor child and invest up to a minimum of Rs 500 and a maximum of Rs 1.5 lakh in a year. However, the cap of Rs 1.5 lakh is inclusive of all the accounts opened by you for yourself or your children. 

This scheme not only helps you build a corpus for your child’s future but also provides you tax benefit in all the years of investment. The principal amount invested during the year in the PPF account qualifies for deduction under section 80C of the Income Tax Act, 1961.

Investment in both your and your child’s accounts is counted for tax benefits. Moreover, the annual interest earned is tax-free and has the benefit of compounding. The interest amount earned every year is added back to the principal invested until the end of the lock-in period. 

When your kid becomes a major, they can continue with the same account in their own name. However, the lock-in period for the same account will not be 15 years as the account was opened by you long back. The corpus can be withdrawn and used to build your child’s future.

Also Read: Investments under section 80C towards PPF and EPF

2. Sukanya Samriddhi Yojana (SSY)

In case you are a parent to a girl child, you can open an SSY account and park your money to secure her future. 

An SSY account can be opened in the name of a girl child who is below 10 years of age as on the date of opening the account. You cannot open two accounts for one girl. A maximum of two accounts is allowed if there are two girls in a family. Once, your daughter crosses the age of 10, she can manage this account on her own. Also, you can continue to invest in the same account. 

It carries the highest tax-free return of around 8-9% with a sovereign guarantee. The contributions made during the year in an SSY account is eligible for deduction under section 80C and the maturity amount is tax-exempt. It comes with the exempt-exempt-exempt (EEE) status. 

You can open an SSY account in the name of your daughter with a minimum deposit of Rs 250. A maximum amount of deposit allowed in a year is up to Rs 1.5 lakh. You will have to keep on depositing for the initial 15 years. 

You can withdraw the amount when the girl turns 18. A maximum of 50% of the account balance of the previous year may be withdrawn for her higher education. The lock-in period of an SSY account is 21 years from the date of account opening. 

3. Equity mutual funds 

Mutual funds linked to equities have the potential to deliver higher inflation-adjusted returns over a long-term period. To build a corpus for your child, which you might need by the end of 12 years from now, stick to large-cap funds. These funds invest in well-established companies and are less volatile. These funds are safe investments, which generate good returns in the long run. 

Mid-cap funds are relatively volatile as compared to its large-cap counterparts. It is advised to research extensively and then invest your money in the mid-cap funds. One can also choose to invest in index mutual funds and multi-cap schemes with an established track record. Do not earmark your money in more than 3-4 funds for your child’s future. 

Investing in equities has many benefits but you must keep an eye on the markets especially when you are less than three years away from your goal. You have to lower the risk attached to the investments as you are near the targets. Shifting to debt from equity will help you move your returns in a safer zone once your target is near.

To conclude, you can invest your money in the combination of all the aforementioned avenues. Do not park your money in just one of them unless your risk appetite is high. It’s about your child’s future – secure it now! 

For any clarifications/feedback on the topic, please contact the writer at komal.chawla@cleartax.in

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