Diversifying Your Portfolio Will Help Saving for Your Child’s Education

Dec 02, 2018 | 1 week ago | Read Time: 4 minutes | By iKnowledge Team

Which investment options are most suitable to include in your portfolio that ensure your child investment goals are met?

Educating your child is the biggest and most heartwarming investment you will ever make. Preparing for the task itself is another matter entirely. With the alarming rate of inflation in education costs, parents are on the lookout to generate enough funds to keep up. With proper fund allocation and defined planning, this feat is easily achievable.

The key to proper planning begins with identifying your financial target based on career options your child is likely to choose from. This is by no means an easy decision, especially if your child is considerably young. However, a safe bet would be to consider building a corpus around engineering, since it is one of the most expensive educational courses.

The fee for a BTech course at IIT today is roughly 10 lakhs, and with the current rate of inflation, it could quite possibly double up to 20 lakhs in 5 years and even 28-30 lakhs in the next 10 years. Even decent engineering colleges offering the course would charge approximately half of the mentioned amount for the same timeline.

You could use Aegon Life’s Education Plan Calculator to assist you in getting a more accurate estimate. All you need to do is fill in the below details:

Two-fold Investment & Insurance portfolio bifurcation

The next step is to figure out a balance between investments and insurance, based on your risk appetite. This means that you generate returns through investments and insurance while saving the corpus for your child’s educational needs in the future. If you have a higher risk threshold, equities and bonds will cover a higher percentage on your portfolio, along with a higher chance of returns. Debt and interest work best for those with a low capacity for risk. In both cases, it is safer to have a child plan, as insurance against uncertainties. Some investment options that you can consider in your child investment plan include:

Public Provident Fund (PPF): A Public Provident Fund is a 15-year scheme you can opt for to build a corpus for your child’s education, while they are still young. The current interest rate of 7.6 per cent, by far, beats interest rates of banks, at approximately 7 per cent. Interest earned on a PPF is tax free in the hands of the investors. Additionally, you can reinvest the tax rebate of up to Rs. 1.5 lakhs that you save under Section 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 since the longer lock-in period reinforces habitual saving and helps you to build a sizeable corpus.

Equity Mutual Funds: Equities have a higher chance of generating considerable returns over a long period of time as compared to other financial instruments. Investing with them to achieve your child plans, however entails the risk of market volatility. There is no guarantee on the market being in your favor, in a time of financial need. This is especially true in the case of future market predictions. However, many equity mutual funds have beaten returns from even bank deposits, and have given sizeable returns. This is a result of constantly staying up to date with market news and volatility, and is some risk that long-time, and seasoned investors, are more likely to consider. Mutual Funds are risky but if you monitor their progress closely, in relation to market volatility, your chances of building up a comfortable cushion of funds for your child plans are relatively high.

Sukanya Samriddhi Account: Another good scheme to consider as part of your child investment plan is the Sukanya Samriddhi Account meant specifically for the girl child. This scheme offers an interest rate of 8.1 per cent and is tax free. There is also a tax benefit offered under Sec 80C of the Income Tax Act. Last year, for the financial year 2017-2018, the interest rate on this scheme was as high as 9.2%. The government has been stressing greatly over educating young girls, and the scheme was introduced as an incentive to educating girls. The lock-in period may be lengthy, but just as a PPF, it inculcates a strict habit of saving with a greater payoff at the end. The corpus you generate for your daughter will not only help pay off her child education plans, but also help save up for her marriage.

ULIPs: Insurance is another way of cushioning not only your child’s educational requirements, but also their financial future in your untimely absence. But what if you could insure and invest at the same time? A dual advantage such as this can be availed by investing in ULIP plans like Aegon Life’s iMaximize Insurance Plan. ULIPs are hybrid financial instruments that allow you to invest a portion of your insurance premiums in the market to generate returns. These plans generally have a lock-in period of 5 years following which you may withdraw up to 20% of your investment in case your child needs it. These child plans are a valuable addition to your portfolio, since they come with tax benefits as per Section 80C and 10(10D) of the Income Tax Act, 1961.

The three most important things to remember when planning your child investment portfolio are safety, returns and tax liability, in that order. Of the three points, safety overweighs the other two, given that you are investing to secure your child’s educational and financial future. The earlier you begin to plan and execute, the easier it is to secure your child plans.

II/Oct 2018/4472


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