5 MinsOct 31, 2022
Today, as we aspire for a better world for our children, providing them with quality education matters a lot; it can enrich and transform their lives.
But quality education is not cheap. And if you aspire to send your child abroad to pursue higher education, it is even more expensive, given that there are other costs involved such as travel, accommodation, etc.
Here’s a five-step approach to planning for a child’s education needs:
1. Estimate the cost of education taking into account inflation. Generally, inflation in education is higher than the headline CPI inflation.
2. Don’t forget to account for the rise in fees, examination/tests fees, coaching class fees, payment towards educational excursions, and the exchange rate in case of education abroad, hostel accommodation, etc. This will
help you estimate a realistic budget.
3. Ascertain the portion of your existing assets or savings and financial investments you can assign for this goal.
4. Allocate your money into equity, debt & fixed-income instruments, and gold, based on your investment objective, the risk you can afford to take, and the time horizon for the goal.
5. Work out periodic investments that need to be done and get started to build the required corpus. Invest smartly and systematically.
Here are some investment options you could consider preparing for your child’s education:
1. Bank Term Deposits -
If your investment time horizon is less than 3 years away, it is sensible to keep capital safe. In such a case, a bank term deposit is a suitable choice for earning fixed, stable, and secured returns.
To make lump sum investments, an FD may be considered. On the other hand, On the other hand, if you want to make regular investments, a bank recurring deposit is a worthwhile option. Note, that
the investment may be made in your name or the name of the child, with you as the guardian and/or second holder.
Axis Bank offers a competitive FD interest rates. If you do not need regular interest pay-outs, choose the ‘re-investment of interest’ plan (also known as the cumulative plan), so that
the money compounds better. To know how much you will earn by investing in bank FD, use Axis Bank’s Fixed Deposit calculator.
2. Public Provident Fund (PPF) -
For a long investment horizon of around 15 years, investing in PPF is worthwhile. It earns stable, secured, and tax-efficient returns. The amount invested entitles you to a deduction of up
to Rs. 1.50 lakh under Section 80C of the Income Tax Act, 1961 per financial year, the interest earned is tax-free, and so are the maturity proceeds. Even partial withdrawals from PPF accounts (which are permitted subject to fulfilling certain conditions) are exempt from tax. In other words, it enjoys a favourable E-E-E (Exempt-Exempt-Exempt) tax status.
As a parent/legal guardian, you can open the PPF Account in your minor child’s name. Plus, you can operate your child’s PPF Account until he/she turns a major (i.e. completes 18 years of age). However, as per the PPF rule book, joint
holding in the PPF account is not permitted.
Use Axis Bank’s PPF calculator to know how much the amount will be at maturity –– the investment + interest.
[Also Read: Open a Digital FD in minutes]
3. Sukanya Samriddhi Yojana (SSY) -
If you have a girl child open an SSY Account and make meaningful contributions to her future.
Like the PPF, the SSY too is a government-backed scheme as part of the ‘Beti Bachao Beti Padhao' campaign. Similarly, like the PPF, it too enjoys an EEE tax status.
You can effectively use SSY to build a respectable corpus for your daughter’s education as well as wedding expenses.
The earlier you start contributing to the SSY Account, the better it is. As a parent either you or your daughter (provided she is 10 years old or more) may operate the SSY Account and deposit the minimum required amount. But once she turns 18
years of age (a major), mandatorily the SSY Account will be operated by her. And when the entire 21 years tenure completes, the SSY Account matures and formally closes.
4. Mutual Funds -
If you are willing to take some risk and earn market-linked returns, consider investing in mutual funds. There are various categories and sub-categories
of mutual fund schemes, choose as per your needs.
If your risk profile is high and you have more than three years for your child’s education, you may consider equity mutual funds. Ideally, it makes sense to invest in equity mutual funds via the Systematic Investment Plan (SIP) route. For
shorter duration goals, select a suitable debt fund.
SIPs are a useful medium to invest regularly and systematically for the financial goal. They make timing the market irrelevant (instead, enable focussing on the goal and ‘time in the market’),
mitigate the risk involved (vide the integral rupee-cost averaging feature), and potentially compound hard-earned money when you select some of the best mutual fund schemes.
5. Gold -
The long-term secular uptrend exhibited by gold is something that you cannot ignore and highlights the importance of owning gold. The precious yellow metal has served as a portfolio diversifier and a hedge against
inflation and during economic uncertainties. That’s why it is often looked up to as a haven commanding a store of value.
Hence, consider tactically allocating around 15%-20% of your investment portfolio to gold via Gold Exchange Traded Funds (ETFs), Gold Saving Funds, and/or Sovereign Gold Bonds (SGBs) with a long-term view. These can be easily liquidated when you need the money for your child’s education needs.
Additionally, you could avail of an Education Loan, if you want a high-quality education for your child without exhausting your savings. Not only will you get a long-term financing option,
but you will also enjoy tax benefits. You can get a loan to meet your budget at a competitive education loan interest rates and enjoy tax exemption on the interest repayment,
under Section 80E of the Income Tax Act.
Another benefit is for students studying abroad. If you pay more than Rs. 7 lakh for your child’s overseas education out of your own funds, you will have to pay 5% TCS. However, if the students avail an education loan from a financial institution
in India, the TCS is only 0.5% Use Axis Bank's Education Loan Tax Benefit calculator to find out how much tax benefit you can get or even use an Education Loan EMI Calculator.
Disclaimer: This article has been authored by PersonalFN, a Mumbai-based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.