Investments for Children: How and where to save money for your child

When it comes to saving for children’s education needs, the role of both equity and debt asset-classes becomes important. The reason to choose one over the other should be determined by the number of years to the goal rather than the risk appetite of an investor, which anyhow needs to be considered.

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Also, between Sukanya Samriddhi Yojana and equity mutual funds, how should you as a parent decide? And, most importantly, what if a parent falls short of the amount required for education even after saving for several years? In an exclusive interview with FE Online, Raj Khosla, Founder and MD, MyMoneyMantra.com, suggests how to navigate between equity and debt financial products at different ages of one’s child.

Based on the age of the child, how should a parent decide the allocation between equity and debt investments?

The investment choices depend on the time available for the goal. If the child is below 10, most goals like higher education and marriage will be at least 8-10 years away. The parent should, therefore, adopt an aggressive strategy that leans heavily on equity investments. Even though equity-oriented instruments are volatile, the ups and downs get ironed out over the long term. Equities have consistently delivered the highest returns in the long term and it is safe to have a mix of 70-80 per cent of the portfolio in equity instruments and the balance 20-30 per cent in debt.

For a child in her teens, the goals would typically be a mixed bag. Some goals like higher education would be quite close, with barely 2-3 years to go, while some goals like marriage would still have 8-10 years to go. The allocation for the near term goals should be entirely in debt, while the longer-term goals can continue to have 70-80 per cent in equities and 20-30 per cent in debt.

If the child is older or grown-up, the goal will obviously be just around the corner. At this stage, when the goal is only 2-3 years away, a parent cannot afford to take too much risk with the investment. The investment strategy should focus on capital protection rather than return maximisation. The parent should move out of equities and focus only on a fixed income.

Between Sukanya Samriddhi Yojana and equity mutual funds, how should a parent decide?

This should not be reduced to a binary decision. Instead of seeing them as potential rivals, investors should use both these investment options to invest for their children’s goals.

The Sukanya scheme has a triple advantage. One, the contribution is eligible for tax deduction under Sec 80C. Two, the interest rate is higher than most other options and the interest earned is tax-free. And finally, the corpus is completely tax-free. But the scheme also has its share of drawbacks. It is open only to girl children below 10 years. There is an annual investment limit of Rs 1.5 lakh and partial withdrawals are not allowed till the girl turns 18.

Equity mutual funds are a convenient way of participating in equity markets. They are transparent, flexible, offer ample choices and adequate liquidity. They should be the preferred choice to invest in goals that are more than 5-6 years away.

What if one is falling short of funds for children’s education needs?

The cost of higher education is rising very fast. Foreign education can cost a bomb. If you are falling short of the target, don’t make the mistake of dipping into your retirement corpus to fill the gap. Instead, you should go for an education loan with your child as a co-borrower. This will not only keep your retirement savings intact but will also inculcate a savings discipline in your child. When she starts paying the EMIs after she gets a job, she will learn the value of money. Lastly, given the current environment, do consider an appropriate Life Insurance policy for yourself – protecting your dreams is always a good idea.