3 Investment Plans to Support the Dreams of Your Smart Child

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With the right environment and parental support, children can achieve greater heights and bigger dreams. So, if your child is showing signs of genius early on, better prepare for her larger than life goals in the future. To fulfil these goals, thankfully there are child plans that help.

The Goal of Higher Education

Before we get into the investment options, let’s get to know the financial goal little better:

• Higher education for your child can include both graduation and post-graduation
• Most likely age to start graduation course is 18-19 years for the child
• Most likely age to start for post-graduation would be 21 to 23 years depending on the length of the undergraduate course
• Considering you are starting the investment for the enhanced goal when the child is 4 years of age, you will have approximately:
  • 15 years for undergraduate admission
  • 19 years for postgraduate admission

The average cost of education from the top universities for undergraduate courses is approximately Rs. 30 lakhs. The average cost of a post-graduation is about Rs. 50 lakhs in present terms. If you consider low average inflation of 3.5% per annum, you will need:

• Rs. 50 lakhs 15 years from now to look after the graduation expenses
• Rs. 84 lakhs more 19 years from now for post-graduation costs

Now that we are clear about the goal let’s having a look at the investment options which can help us achieve them:

1. Public Provident Fund (PPF)

Public provident fund is the safest investment option to fulfil your financial goals which are at least 15 years away from now. The salient points of using PPF for investing in your child’s undergraduate goal are:

• Invest up to Rs. 1.5 lakhs every year
• Enjoy deduction of up to Rs. 1.5 lakhs every year under section 80C
• Safe returns with a sovereign guarantee
• Zero tax liability and tax-free maturity value
• Get up to Rs. 45 lakhs with 15 years of investment and about Rs. 75 lakhs with 20 years

If the little genius is your daughter, you can also use Sukanya Sammriddhi Yojana (SSY) to invest in her education goal. The investment features of SSY are similar to PPF, except that you can only operate the account in the name of your daughter.

Limitations of PPF Investment:

While PPF and SSY investments are safe and good for stable long-term returns, they do pose a few limitations:

• The maximum amount you can invest every year is limited to Rs. 1.5 lakhs (may change in future as notified by central government)
• You must invest most of your annual instalment at the beginning of the financial year to gain maximum interest.
• The interest rates are variable and keep changing as per the market rates as announced by PFRDA (PF authority)
• After 15 years you have the option to extend the account or withdraw immediately. In case of extension, you can only extend in batches of five years.
• You operate more than one PPF accounts but can only deposit up to Rs. 1.5 lakhs in all the accounts combined in a financial year

While PPF is a highly tax-efficient and safe investment, it may just fall short of your goal. Therefore, if you are using PPF to save for your child’s goal you need to ensure two things:

1. Have another investment plan to fill the gap in your financial need and PPF corpus in future

2. Add the goal value to your term insurance cover, so that your child can still meet her goal even if anything happens to you.

2. Guaranteed Saving Plan

Guaranteed savings plans are goal-based investment schemes from life insurers. The best feature of this investment plan is that the future value consists of mostly guaranteed amounts. Other important features of guaranteed plans are:

• Bonus additions for long term investors
• Inbuilt goal protection option: The insurer will deposit all the remaining premiums on your behalf in case of your early death.
• Deduction under section 80C for invested money up to Rs. 1.5 lakhs and tax-free maturity value
• Get an additional bonus for higher premium payment
• There is no maximum limit on the yearly investment amount

Since this is a guaranteed investment you will know your maturity benefits at the time of starting this investment.

Limitations with Guaranteed Saving Plans:

Although guaranteed saving plans provide more flexibility to you in term of investment and maturity value, you should carefully consider the following:

• The premium commitment remains fixed to a guaranteed plan
• You need to deposit all premiums on time to avail the maximum bonus additions

3. Unit Linked Insurance Plan

Unit linked plans are way more flexible than both PPF and guaranteed plans when it comes to investment. However, that does not affect the range of benefits in a ULIP plan. You can do a lot more with a ULIP plan than PPF and guaranteed plans.

Here are the benefits of using ULIP to save for your child’s higher education:

• The choice to create an aggressive or safe portfolio:
  • Add equity to the portfolio for long-term returns with market performance
  • Create a safe portfolio with only Gilt fund and corporate debt
• Use automated strategies to manage your asset allocation and investment risk
• Goal protection option to ensure that your child can meet her goal despite your untimely demise
• No limits for maximum investment
• Deduction under section 80C for the invested amount and tax-free maturity value
• Use a single ULIP plan to meet both graduation and post-graduation goal, using tax-free partial withdrawals
• Bonus unit allocation for long-term investors and high premium contribution

Limitations with ULIP Investment

ULIPs suffer a few limitations when it comes to annual investment and taxes. But, with minor tweaks, you can overcome these limitations easily. Here’s how:

• Keeping the Investment Tax-free: You need to ensure that your annual investment in any financial year is not greater than 10% of the base life cover of the policy, otherwise, you lose the tax-protection of the scheme

  To resolve this, you can opt for a slightly higher sum assured than 10 times your annual investment.

• Partial Withdrawal Limits: You may face a limit to the amount you can withdraw during partial withdrawal from ULIPs. ULIP plans like Invest 4G from Canara HSBC Life, mandate that your partial withdrawal should leave at least 120 times your annual premium as balance corpus in the plan.

ULIPs are the only investment you can use as a single investment option for your child’s goal. However, with other investments, you may need to combine more than one plan to achieve both graduation and post-graduation goals.