Which investments to pick for your Children’s Education?

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You welcome a new member to your family. After the initial euphoria settles down, you get serious and want to start investing for your child’s education and wedding.

How should you invest? Which products should you consider for your portfolio?

In this post, let’s find out.

#1 Debt Investments

#1 PPF

Open PPF account for your son/daughter.

PPF is an excellent fixed income product for the long-term portfolio. Both interest and the maturity proceeds are exempt from tax.

However, I don’t suggest that you open PPF for your son/daughter to save for his/her retirement. Let her manage that as she grows old.

The idea here is to simply get the countdown to maturity of 15 years started. PPF becomes extremely flexible after initial maturity of 15 years. You can extend it in blocks of 5 years (with or without contribution) any number of times. This means a PPF account can be continued for life. After the initial maturity of 15 years, the restrictions on withdrawals also go down drastically.  If needed, this money can be easily used for children’s education too. Hence, the sooner you open PPF for your kids, the better it is.

Maximize contribution to your own PPF account (for your own retirement). Just keep making a small contribution to your kid’s account. PPF account is also a good place to route the money children get from their grandparents/uncles/aunts/relatives on their birthdays, festivals, or any other occasion.

Note: You cannot put more than Rs 1.5 lacs (cumulatively) in a financial year in your PPF account and PPF accounts where you are the guardian. Excess contribution does not earn any interest. Hence, if you are the guardian in your kid’s PPF account, suggest you keep this aspect in mind.

#2 Sukanya Samriddhi Yojana Account

If you have been blessed with a daughter, you can also open an SSY account.

The account matures 21 years after the date of opening. The account closure is not linked to the age of the child. You (your daughter) have an option to close the SSY account at the time of her marriage.

This accounts also permits partial withdrawals of 50% of the accumulated corpus for higher education.

SSY is a very fine product. Risk-free. Good rate of return for a fixed income product and tax-exempt returns. However, I find it a bit limiting.

  1. Can use only up to 50% for higher education. Full withdrawal allowed only for marriage. Hence, restrictive if you want to save for daughter’s education.
  2. The account cannot be continued for life (unlike PPF).

There are other products such as recently launched NPS Vatsalya. NPS Vatsalya is an NPS account for minors and is managed by the guardian (parent) until the child turns major.

NPS Vatsalya is a decent product and allows for tax-free compounding and rebalancing for many decades. However, it is a retirement product. Given the restrictions on withdrawals, you cannot use this product for child education. And when it comes to saving for retirement, I would suggest that you focus on your retirement than your children’s. I wouldn’t be too keen on NPS Vatsalya. You can consider recurring deposits/fixed deposits/debt funds too, but you will face an adverse tax regime.

#2 Equity Mutual Funds or stocks

This is important.

If your child is below 5 years, you have at least 10-12 years before the kid goes to college. The long-term nature of this goal allows you to take risks, invest in growth assets (stocks, mutual funds etc.) and potentially earn higher returns.

You can start a SIP in a low-cost mutual fund and keep at it. Ignore the market noise and keep accumulating. I assume you have the requisite risk appetite to invest in stocks or equity funds. Everything I mentioned about equity investments above is useless if you do not have an appropriate risk profile.

By the way, the MF industry can offer investment schemes in line with your risk profile. If pure equity products are too volatile for you, you can consider hybrid products.

Please understand there is no free lunch. High risk does not guarantee high returns. Hence, there is no guarantee of good returns from equity investments even if you invest for the long term. This is even more true for investing directly in a few stocks. With a mutual fund, at least your money is spread across multiple stocks. When you put money in just a few stocks, the risk is much higher.

#3 Gold

You can allocate to gold too. Accumulating gold gradually can be particularly useful if you foresee the need for gold during kids’ weddings.

There are multiple ways of investing in gold. You can buy physical gold, jewellery, gold ETFs/mutual funds, or Sovereign Gold Bonds (SGBs). I prefer SGBs (but buying SGBs has become complicated of late). You can select based on your preference. I would suggest you avoid buying jewellery for investment since you will unnecessarily incur making charges.

How much to invest?

You start an SIP of Rs 1,000 for your daughter’s education. You continue the SIP for 15 years.

Assuming your investment gives you an XIRR of 12% p.a., you will end up with ~5 lacs after 15 years.

What if you needed Rs 25 lacs for undergrad education?

In that case, while you ticked the checkbox of investing in mutual funds, you were investing only 20% of what you needed to.

Hence, don’t just invest, invest enough.

Do a few basic financial calculations in Microsoft Excel to figure out how much you need to invest per month (or year) to accumulate the desired corpus.  Account for inflation too. And invest requisite amounts.

Note: Except for PPF and SSY, you do not have to invest in your child’s name. You can invest in your name and earmark investment for kid’s education.

What should be the Asset Allocation?

Personally, I do not like to manage asset allocation for each goal. I prefer to manage asset allocation at the overall portfolio level, which ensuring sufficient liquidity for various goals. I find this approach simple and easy to account for mentally.

Given that this is a long-term goal, there is a case to invest in risky assets (stocks and mutual funds) and potentially earn higher returns, provided your risk profile permits. You should be able to digest volatility in the equity markets.

I would start with a very aggressive allocation for this goal and ensure liquidity at the portfolio level when the expense for higher education comes due. Liquidity can be created through the sale of investments earmarked for the child’s education or through some other asset sale. This can be a portfolio level decision.

Alternatively, you can keep it simple. Start with an aggressive allocation. Decide a glide path for reducing allocation as you inch towards the expense date and can keep rebalancing accordingly. For instance, say your daughter’s education is 15 years away. You can start with say 100% allocation to equity funds. When the goal is 10 years away, you shift to 75:25. When the goal is 5 years away, you move to 50:50 and then reduce by 10% each year. Easier said than done, but having a rule helps.

Note the glide path I have suggested may work for a kid’s education, but not for your retirement. Hence, exercise discretion.

Why have I left out insurance plans?

Life insurance companies aggressively sell products (ULIPs and traditional plans) to help you save for your children’s education. ULIPs offer market-linked returns, while traditional plans (non-linked. Participating and non-participating) offer debt-like returns. So, these products can give you both equity and debt exposure.

The extant tax laws also dole out favourable tax treatment to insurance products.

However, I have left out such products completely from my list.

Reasons: High cost, Lack of Flexibility, and difficult premature exit

These plans are expensive, and high costs eat into investor returns. These plans also rank low on flexibility, as it is difficult to exit an underperformer. Additionally, there is either a lock-in (5 years in case of ULIPs) and a heavy penalty in case of premature-exit (in case of traditional plans).

At the same time, I have my biases, and these biases influence my feedback. I am quite comfortable with mutual funds or any other market-linked products. That may not be the case with you.

I must concede, there is one area where you may find merit in these products, despite these products being sub-optimal. These insurance plans can sometimes fit into your use cases.

Let’s consider one such use case.

You want to invest Rs 1 lac per annum for your daughter’s education for the next 15 years. You also want this investment to continue even if you are not around. Essentially, you do not want your own demise to compromise investments for your daughter.

Now, such solutions would require an insurance component. Pure play investment products such as mutual funds, PPF, SSY etc.) cannot offer such a solution.

ULIPs and traditional plans can structure such solutions. Expensive and sub-optimal, yes. But such a product may allow you peace of mind.

You may argue that one can buy a term plan, and the family can utilize insurance proceeds to make investments. Term life insurance is also the cheapest form of life insurance. That’s a valid point but ignores a key practical aspect. How do you trust your family to manage money as well as you do? Once the term insurance amount is in their hands, they can be influenced to make bad decisions.

Coming back, while I stay away from insurance products to save for children’s education, you can consider such a product if it solves a use case for you. You don’t have to optimize everything.

Review your insurance requirements

Insurance is the first pillar of financial planning.

The planned investments can continue only as long as you are around. After you, these investments will stop.

Hence, you must buy adequate life coverage. Your life cover should be sufficient to close off your loans, provide for your financial goals, and cover the regular expenses of the family. When you welcome a baby in the family, you add a few financial goals and hence your life insurance requirement goes up.

Hence, review your life insurance cover as you cross various life stages and buy a term insurance plan if there is a deficit.

Disclaimer: Registration granted by SEBI, membership of BASL, and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors. Investment in securities market is subject to market risks. Read all the related documents carefully before investing.

This post is for education purpose alone and is NOT investment advice. This is not a recommendation to invest or NOT invest in any product. The securities, instruments, or indices quoted are for illustration only and are not recommendatory. My views may be biased, and I may choose not to focus on aspects that you consider important. Your financial goals may be different. You may have a different risk profile. You may be in a different life stage than I am in. Hence, you must NOT base your investment decisions based on my writings. There is no one-size-fits-all solution in investments. What may be a good investment for certain investors may NOT be good for others. And vice versa. Therefore, read and understand the product terms and conditions and consider your risk profile, requirements, and suitability before investing in any investment product or following an investment approach.

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