Any investment plan for wealth creation needs careful consideration. But child investment plans require extra care to start with. The inflation factor needs to be considered at all times while planning for child investment. Beginning from early childhood, the child’s needs are required to be fulfilled up until he/she attains adulthood and sometimes, even beyond that.
While funding for the child, one of the most crucial factors is the educational factor. The financial requirements will gradually change as the child gradually grows up. There are many investment opportunities for financial wellbeing; and a plethora of child investment plans currently available in the market. The challenge is to select the one or the ones that will relevantly cater to the unique requirements of any individual investor.
Investment Options For Child
Public Provident Fund
As a long-term investment option, Public Provident Fund or PPF is considered to be a wise choice. The interest obtained through this scheme is tax-free. Every quarterly, the government decides the rate of interest of the scheme for a particular tenure. It generally revolves around 8% on an average basis. PPF compounds the interest annually thus significantly enhancing the wealth.
One of the major turn-offs for PPF is that it comes with a lock-in period of 15 years. The parents can open a minor PPF account in the child’s name along with their own. The combined interest earned will be eligible for tax benefit up to INR 1.5 lakh annually.
A minor PPF account can be continued by the child even after growing up. As a long-term investment tool, PPF is one of the safest investment options.
Bank Fixed Deposit
One of the most popular investment options, bank fixed deposits are considered to be one of the most secure and safest modes of investment. Despite taxable interest-earning, this has been one of the most popular investment tools.
The rate of interest of the bank fixed deposits differs from one bank to another and is also dependent on the tenure of investment. The average trend shows that it generally ranges between 6% and 8% per annum.
Although the interest earned is taxable, a 5-year term fixed deposit enjoys tax benefit under Section 80C of the Income Tax Act. Interest earned above INR 40,000 in a single financial year is subject to TDS, for which submission of 15G/H is mandatory.
Because of guaranteed assured returns, this scheme is widely popular. But one of the major drawbacks of the scheme is that despite assured returns, it is not competent enough to cope up with the rate of inflation.
Endowment policies are considered to be a pretty good investment tool for the child. Unit Linked Insurance Plan or ULIP is also a wise option in this respect.
Here the parents pay the premium to ensure a financially secured future for the child. These sort of insurance plans ensure guaranteed returns with the benefits of component savings. Occasionally, these plans offer interim payouts to fulfil the differing educational costs of the child.
It offers secured insurance coverage along with market-linked investment benefits. The premium payable under any insurance scheme is eligible for tax deduction benefit up to INR 1.5 lakh per annum under Section 80C of Income Tax Act, which is a good option considering tax planning. Moreover, the maturity benefits of this scheme are also tax-free under Section 10(10D) of the Income Tax Act.
There is a premium-waiver option in case the investor dies an untimely death. This sort of scheme ensures the financial security of the insured child, despite the absence of the investor.
There are broadly two types of mutual funds—equity-oriented and debt-oriented or even a conglomeration of both. It entirely depends on the financial goal, financial planning and the risk appetite of the investor parent. The return form mutual funds are entirely dependent on the overall market performance.
Equity Mutual Funds
Investing over 65% of the entire portfolio inequities are termed as equity mutual funds. This sort of investment is capable of coping up with inflation to a significant extent. It is safe to choose large-cap mutual funds of reputed and established companies as a secured source of investment ensuring high returns in the long run.
Debt Mutual Funds
The risk quotient in debt mutual funds is considerably lower than equity mutual funds. Depending on the financial capacity and financial target of the investor, there is a wide range of options to choose from. Companies with a credit rating of AAA are advised to invest in for better returns and assurance.
Gold investment has been a conventional method of investment for a long time. But, nowadays, gold investment does not necessarily require physical gold. Investing in Gold ETF is a popular long-term investment option for children. Gold ETF stands for Gold Exchange Traded Funds. The gold value can be purchased and sold electronically. There is no risk of storage, theft or purity concern. It is best to invest gradually in gold ETFs and build-up a sizable wealth.
The gold ETF can be transferred to physical gold during the child’s marriage.
Long Term Investments For Child
The investor needs to be clear about the financial targets regarding the child’s future. He/she chooses long-term investment options to cater to the child’s financial needs.