DT Personal Finance: How to invest in your children’s future?

CHENNAI: When it comes to children, parents go out of their way to ensure that critical funds are never an issue. So how does one plan for such necessities? And which are the instruments one could consider for investments?

Here are three options:

• Sukanya Samriddhi Yojana account – debt option available for daughters only

• PPF account – debt option available for both sons and daughters

• Equity funds – equity option also available for both sons and daughters

Debt options - SukanyaSamriddhi + PPF

Both Sukanya Samriddhi Yojana and PPF are pure debt instruments. While the Sukanya account is available only for daughters, the PPF account is available for both sons and daughters.

As of now, Sukanya account offers 8.0% and PPF offers 7.1%. So, when it comes to interest rates (or returns), Sukanya is obviously a better option. But it’s not wise to look only at interest rates when choosing as the conditions are different in both options.

The Sukanya account can be opened for girl child up to the age 10. The account though has a 21-year tenure (or closes after daughter’s marriage), parents can make deposits only till the 15th year. The account continues to generate returns for a full 21 years but you cannot make any additional contributions between 15th and 21st year. There is another operational restriction. The entire corpus for Sukanya is locked-in till the girl child reaches the age 18. But only a maximum of 50% of the amount can be withdrawn for higher education expenses. So, liquidity is an issue if for some reason, your daughter’s higher education expenses are more than the 50% limit of what is accumulated in Sukanya account.

On the other hand, a PPF account can be opened for both boys and girls. Per the rules, PPF matures after 15 years. Conservative investors (and parents) might prefer pure debt options like Sukanya Samriddhi and PPF. But when you are saving for the long-term, the best bet to generate inflation-beating returns is to invest in equities. And that brings the next option we discuss below.

Equity option - Equity funds

The cost of higher education is skyrocketing. Given the current trends, 7-8% interest generated by debt instruments may not be adequate to beat the inflation in education costs.

So, if you just rely on debt, you may end up with inadequate savings for your child’s future. Historically, equity has delivered 10-12% average returns in the long term. Though past performance is no guarantee of future returns, it can still be a reliable indicator of what are the possibilities.

If one is a moderately aggressive investor, some allocations to equity funds can be considered, apart from monthly investments via SIP. While PPF+Sukanya, and Equity Funds are suitable options to consider, the next question is how to divide your investments between these?

If you don’t want to take any risk and are fine with 7-8% offered by Sukanya and PPF, then keep it simple and limit yourself to Sukanya and PPF only. Say you are planning to invest Rs 25,000 monthly, then channel Rs 12,500 each in Sukanya Samriddhi and PPF accounts.

On the other hand, if you are a balanced or aggressive investor, then you can invest at least 50-75% in equity funds and the remaining 25-50% in Sukanya (and/or PPF). While we’re on the subject, consider opting for traditional insurance plans or ULIPs as well.