It is not easy to plan for a child’s future. The majority believe they have planned correctly, but they discover their funds are insufficient when the time comes. Thus, while planning, it is critical to make the appropriate investment selections at the appropriate times. There are numerous child plan alternatives available on the market, but you should choose those best suit your needs.
The following are some of the top investing alternatives available to parents for securing their child’s financial future:
Systematic Investment Planning (SIP)
For longer-term goals such as child education, systematic investment planning (SIP) in equity mutual funds may be considered. The lengthier time horizon is often between seven and fifteen years or more, and the minimum investment amount with SIP is typically set at Rs 500.
With the power of compounding, gains from equities mutual funds are more likely to outperform the inflation rate of 5% to 6% each year when investing via SIP. As a result, long-term equity mutual fund investing via SIP is one of the finest solutions for critical goals such as a child’s higher education or marriage.
Debt funds provide a lower risk profile than equities mutual funds. The money is deposited in various bank deposits or bonds, and interest is earned by lending the funds and earning interest, which is the source of returns.
Debt mutual funds are well suited for kids’ everyday needs, such as school fees, as they provide quick liquidity.
Short-term debt funds offer greater flexibility in terms of withdrawals and investments.
Sukanya Samriddhi Yojana
The Sukanya Samriddhi Account is another great investment strategy that can help you establish a large corpus for your child’s education and is a good child investment plan. This tax-free scheme gives an interest rate of 7.60%. Of course, this is an option only if you have a female child. Additionally, there is a tax benefit available under Section 80C of the Internal Revenue Code. One must keep in mind that this option is exclusive to female children. Therefore, if you have a female child and wish to save for her marriage or education, you may benefit from this arrangement. Again, the sole concern is lock-in, but you establish a sound corpus for a more extended period. The key disadvantage of this strategy is that interest rates may be revised from time to time. The interest rate offered is far higher than that supplied by banks, which is a significant plus.
Term Life Insurance
A pure term insurance policy protects your child in the event of the parent’s death. This risk cover mitigates the financial impact on a family or child if the family’s breadwinner dies.
When choosing a term insurance policy for a child, it is best to choose one that covers all essential expenses such as schooling, livelihood, and marriage.
You can invest in gold for the benefit of a child. However, do not do so with physical gold. The best choice would be gold ETFs, as they do not require a locker or other form of storage. Additionally, you can invest in electronic form without fear of theft. By investing tiny amounts each month, you can accumulate a sizable amount. Of course, the negative is that when you sell, you must pay capital gains tax. However, you can opt for jewellers’ schemes, which may be advantageous if you have a female child and purchase jewellery for her.
Mutual funds that invest in stocks
Everybody is frequently overconfident in their ability to build riches for their children through equity mutual funds. This, however, carries considerable risks. One cannot predict how the markets will behave at the time of redemption or if your child requires the money. For instance, if you wish to redeem all of your units in 2030 to help a child in need, you are uncertain whether the markets will be buoyant at that time. However, several equity mutual funds have outperformed bank deposits in terms of returns and have generated sizable profits. As a result, if you are a long-term investor, these tend to provide unparalleled returns. If you’re looking to save money for your children’s education or any other purpose, equity mutual funds are an excellent choice. Because the income received by equity mutual funds is now taxable, your overall returns may be reduced. Thus, one must exercise extreme caution while selecting equity mutual funds. Be cautioned that these are risky investments, and there is no guarantee that the markets will be favourable at the time of redemption. Consider a somewhat riskier child investment strategy.
This is the optimal investment strategy for a variety of reasons. It is a 15-year plan during which you can save funds for your child’s education—the current interest rate of 7.1%.
In the hands of investors, interest earned is tax-free. Additionally, you are eligible for a tax deduction of up to Rs 1.5 lakhs under Section 80C of the Income Tax Act.