Many parents these days look at the Unit Linked Insurance Plans and children saving plans that insurance companies and fund houses tend to provide. They do provide insurance and some sort of safety comfort for your child’s education, but, the returns are poor. In fact, if you deduct the expense associated with these child’s plans your returns are reduced.
This is the best scheme to invest for a number of reasons. It is a 15-year scheme where you can build a corpus for your child’s education. The current interest rate of 8 per cent by far beats interest rates of banks, which are at 7.5 per cent. With the RBI hiking interest rates and bond yield rising, it is hoped that the government would revise the interest rates from the coming quarters. The interest earned is tax free in the hands of investors. Apart from this you get a tax rebate of upto Rs 1.5 lakhs under Sec 80C of the Income Tax Act. All in all this makes it a very attractive scheme to invest. This is probably one of the best ways to build a child plan corpus. Only the larger lock-in period is the only worry, but, that in turn helps you to build a corpus. Go for this as they are more tax efficient as well. Safety is a big assurance as far as the PPF is concerned.
You can invest in gold for a child of yours. But, do not do it through physical gold. The best option would be the gold ETFs, because there is no locker and other storage charges. Also, you can invest in the electronic form and there is no worry of theft. You can invest small amounts each month and thus build a sizeable one by buying small amounts. Gold has generated much better returns than most asset classes in the more longer term. So, typically a holding period of say 10-15 years could result in decent gains. The disadvantage of course is that you have to pay capital gains tax when you sell. However, you can also go for jeweller schemes, which would be helpful if you have a girl child and have some jewellery for her. Risk of fall in gold prices remains a worry, though over a period of time, gold has always outperformed. At the moment 22 karats gold in Mumbai is trading at Rs 31,000. Because of hardening of interest rates, gold prices have fallen a bit. They can be a good bet at the current prices for long term.
Equity mutual funds
Everybody often goes gung-ho with equity mutual funds to generate wealth for children. However, this has some risks. The problem is one is not sure at the time of redemption or if your child needs the money, how the markets would be. For example, if you want to redeem all your units in 2030 to meet a child need you are not sure if the markets would be buoyant at that time. However, many equity mutual funds have beaten returns from even bank deposits and have given sizeable returns. So, if you are a long term investor, these tend to give you returns like no other. If you are planning to save money for your children’s education or other such plans, look no further then equity mutual funds. The income distributed by equity mutual funds would now be subject to tax, so your overall returns could reduce. So, one as to be really careful before choosing equity mutual funds. Be warned that these are risky and there is no certainty that at the time you want to redeem the markets would be high. A slightly more risky child investment plan to consider.
Debt mutual funds
Some debt mutual funds offer better returns than bank deposits. They are also more tax efficient than bank deposits, which makes them a better choice. However, you need to opt for the safe child plans more than anything else. Go for them if you are planning a very long term investment, given the fact that they give better returns in the more long term. Again, you may need some professional advise here, given the fact that some of these schemes could be a little risky. Go for debt mutual funds that are heavily tilted towards AAA securities. This would provide you some respite in case markets fall. Gilt edged funds, which invest most of the money in government security may also be good a bet. Returns from debt mutual funds would largely be in line with interest rates in the economy, which are now offering between 7.5 to 8 per cent.