Choose wisely from the plethora of options, considering the long-term nature of the need
This year began on an august note for the Mishra family when their first born child arrived. The celebrations over, Mr. Mishra wrote in to seek assistance on what he should do from now on to save for his daughter’s future financial needs towards education, which is a good 18-20 years from now. His concerns were palpable, given the rising cost of education. Besides, the new born had received a lot of money as gift, which he wanted to park aside as quickly as possible.
Savings options
The temptation to go in for a focused child savings instrument is understandable. Child protection plans from insurers are an option, but not the best, given the time period in question. Moreover, there is a lump sum to set aside at the moment, which is not necessarily the sum which will appear each year. Given the unequal flow of monies, if savings is considered, it should be considered with the intention of being illiquid that is locked-in for a long time to discourage any signs of an early withdrawal.
If they have never invested so far, they should consider putting money into the Sukanya Samriddhi Yojana (SSY), which is a post office scheme meant to help parents save for their daughter's future. Currently, it offers a tax-free interest at the rate of 8.6 per cent, which pales compared to the 9.1 per cent it offered when it was first introduced in 2015. Yet, it is the highest among the guaranteed return schemes available at the Post Office.
This scheme is for a minor girl child younger than 10 years and can be opened only in the name of the child. You can open accounts only for two girl children. If you have twin girls in a second birth, and you already have a girl child, then you can open a third account. The initial deposit is Rs 1,000 and thereafter any amount in multiples of Rs 100. The total deposit you can make in a financial year cannot exceed Rs 1.5 lakh and you can make deposits for 14 years from the date of opening of the account.
Contributions to SSY are eligible for section 80C tax benefit and, hence, the Rs.1.5 lakh that can be deposited in the account in a year will be tax exempt. While the scheme carries duration of 21 years, you are not required to make contributions for all these 21 years. You can invest only for the first 14 years, after which you need not deposit any further amount. So, if you invest Rs 2,000 every month in SSY for 20 years, assuming the rate of return remains 8.6 per cent, you will gather a corpus of Rs 12.28 lakh.
However, your account will keep earning an interest rate for the remaining seven years. One can deposit a minimum amount of Rs 1,000 annually in order to keep your account active. If you fail to do so, your account turns inactive and can be retrieved only after paying a penalty of Rs 50 along with the minimum amount of Rs 1,000.
Upper hand with equity
Investing in equities pays off in the long run, and the financial needs of a child, especially towards education are a good 18-20 years from their birth. Use this long period to build a sizeable corpus. For instance, if you had parked the same Rs 2,000 into an SIP in a diversified equity fund for 20 years, earning a modest 12 per cent returns, the corpus would be Rs 18.4 lakh. Going by the long-term returns on the Sensex, which is about 16 per cent, the potential for growth is actually about Rs 30 lakh.