For parents, saving for their children’s future is among their top priorities. And rightly so. A good course from a good college can set a child’s career on the right track.
While there are several investment options available to secure your children’s future, these are the top three:
· Sukanya Samriddhi Yojana (SSY): for daughters only.
· Equity mutual funds (MF): for both sons and daughters.
· Public Provident Fund (PPF): for both sons and daughters.SSY and PPF
Since both are debt instruments, we will discuss them together (though Sukanya Samriddhi is only available for daughters).
When it comes to interest rates, SSY is better at 7.6 percent vs. PPF at 7.1 percent. But that shouldn’t be the only reason to pick SSY over PPF.
Also read | Last minute tax-planning tips
An SSY account can be opened for a girl child up to the age 10. It has a 21-year tenure (or it will close post her wedding). Deposits can be made till the 15th year. The SSY corpus will still generate returns from the 16th to the 21st year. One cannot make any additional contributions from the 16th to the 21st year.
The entire SSY corpus is locked-in till the girl child attains the age of 18. Thereafter, only up to 50 percent of the amount can be withdrawn for educational needs. Hence, liquidity may be an issue. What if your daughter’s higher education requires more money than the available 50 percent of the SSY corpus? You have more lying there but it’s not available at your time of need.
Nonetheless, there is some merit in SSY, and it gives better tax-free returns. But if liquidity after the 15th year is a concern, then having a PPF account is also advisable, as one can withdraw funds from one’s PPF account after 15 years. PPF provides greater flexibility and can be used as an investment tool even after the daughter’s marriage or the closure of her SSY account.Equity MFs
But neither PPF nor SSY are the best options if your daughter’s higher education goals are several years away. Why?
That’s because both PPF and Sukanya are long-tenure debt products. Given the high cost of education and the inflation these days, it’s possible that the savings in SSY and PPF alone will be unable to match the pace of inflation. The result will be inadequate savings. And that is something that you would never want as a parent.
Sound investment logic demands that when investing for long-term goals, it’s better to invest more in equity as that is the only viable option to generate inflation-beating returns in the long term. Doing so through a disciplined SIP (systematic investment plan) in equity funds is your best bet.
How to split your money between MFs, SSY and PPF?
Here are a few thumb rules to follow:
· If you are ultra-conservative and the goals are 15-plus years away, then keep it simple and give your 100 percent to SSY and PPF.
· If your children are older, the long lock-in periods of SSY and PPF may not align with your goal requirements. In that case, you can pick a few debt MFs.
· If you have a moderate risk appetite, then allocate 50 percent to equity MFs, and split the remaining 50 percent between SSY and / or PPF.
· For moderately aggressive to aggressive investors, it can be 80-100 percent in equity funds, and the remaining (if any) in SSY / PPF.
If you are looking for some real numbers to suggest how much to invest, below are a few:
· If you need to accumulate Rs 75 lakh in 15 years, then invest Rs 18,000-19,000 per month in an 80:20 equity MF:debt split.
· If you need to accumulate Rs 50 lakh in 10 years, then invest Rs 24,000-25,000 per month in a 65:35 equity MF:debt allocation.
· If you need to accumulate Rs 35 lakh in 6 years, then invest Rs 36,000-37,000 per month in 40:60 MF:debt allocation.
Thus, the earlier you start, the better it is. For instance, if your target is to reach Rs 50 lakh in 10 years then you need to invest Rs 24,000-25,000 monthly at a roughly 65:35 MF:debt split. But if you start earlier and have 15 years to reach the same goal, then you only need to invest Rs 12,000-13,000 per month.Insurance is also importantBut just investing adequately every month is not enough, if god forbid something were to happen to you. Make sure you buy a large term life insurance cover that provides enough money not only for your children’s higher education and marriage, but for regular household expenses as well (if you are the sole-earner), children’s school expenses and other goals like a house purchase, etc.