In India, children are celebrated in ways that the western world would fail to understand. We rejoice and celebrate every milestone they cross and it is in our cultural value to secure their future. This is drastically different from western nations where children have to find their own means of securing their future after they turn 18. With extravagant celebrations, education and marriage on the roadmap as soon as a child is born, parents might feel the financial burden piling on one after the other. The direct inference of this is that this expense will increase with each additional child.
So, what are your options when it comes to securing their future? For this article, we are not considering bank deposits like savings bank accounts as the returns from those accounts are extremely less.
Sukanya Samriddhi Account
You are eligible to use this account ONLY if you have a girl child. This initiative by the Government of India guarantees a return of 8.5% per annum. If you are able to spare a monthly amount of even Rs. 5000 every month, the corpus can grow substantially with compounding. Another added advantage of this is that the interest from this amount is not taxable under section 80C of the Income Tax Act. Although the returns are low, they are much greater than the standard returns you can expect from savings accounts from leading banks. Please note that there is a lock-in period during which you cannot withdraw your money.
Equity Mutual Funds
Equity mutual funds are managed by the fund managers of your banks. You can approach the regional manager and proceed with investing a pre-agreed upon amount with which their fund managers will invest in companies for you. However, if you know the ins and outs of how the equity market works, you can invest in direct mutual funds and enjoy up to 1% per year extra in returns. On an average, if the market does not trade in extremely volatile conditions throughout the year, you can expect up to 12-14% in returns every year.
A few companies allow investors to deposit their money for the usage of the company while guaranteeing a certain amount as the return. This comes with its own risk and a lock-in period of minimum 5 years. In fact, most companies do not have deposit accounts for longer periods. The returns you can expect from such company deposit accounts are around 8% annually. To use this provision, you have to use your bank or trusted NBFCs (Non Banking Financial Companies) to do it for you.
Systematic Investment Planning
Systematic Investment Planning or SIP allows you to invest in companies which have a good Compounded Annual Growth Rate. For example, you can invest a pre-set amount of money every month in sturdy companies and expect returns which correspond to the company’s profit every year. For example, a 10 year SIP in Sundaram Finance would have given you a CAGR of around 15%. This is much greater than the amount you can expect from mutual funds or fixed deposits.
Gold has been considered for generations as one of the best investment options by Indians. So much so that around 33% of the world’s gold is owned by Indian housewives. But how much has gold appreciated in the last 20 years? Ten grams of gold cost Rs. 4045 in 1998. Today (5/12/2018), the cost of 10 grams of gold is Rs. 30,000. If you had invested Rs 1,00,000 in gold in 1998, you would’ve made Rs. 6,20,000 in profits in 2018. If you had kept adding to this every month or year in a systematic rate, the compounded returns would be much higher. But please note that the same projection might not hold true for the next twenty years. Therefore, it is better to invest in entities which give definite returns.
Debt Mutual Funds
If you opt for debt mutual funds, your capital is given as a loan to debt securities like government bonds, treasury bills and other corporate bonds. Banks and NBFCs will assess the credit replayability capacity of the bonds using several criteria and then take a decision. They will mostly select AAA securities which have very high creditworthiness. A comprehensive fundamental analysis goes into selecting the bonds for debt mutual funds. Please note that you cannot withdraw your money for a set amount of years and the interest rate will be around 8% per annum.
Public Provident Fund
PPFs are government backed, long-term investment options. It guarantees 8% returns annually for 15 years. The return rates are also subject to RBI policies and rate of interest changes. One of the biggest advantages of this option is that the returns are fully exempt from tax under section 80C of the Income Tax Act. During the 7th financial year of your payment, you will be allowed to partially get back your money which would otherwise be in a lock-in period for the 15 years.
The rate for properties is always skyrocketing in the city. But what is now considered ‘city limits’ was considered as the ‘outskirts’ 20 years ago. And 20 years ago, the property would have been very much affordable. Therefore, consider buying a property in the outskirts of the city you are living in and wait for urban development to do its job. So 20 years from now, it would be of considerable value. However, please ensure to conduct adequate research about developmental projects coming up in the area. Our suggestion is that, instead of spending several lakhs on your wedding, you could invest a considerable part of that in buying a property.
In our opinion, the best time to start the financial planning of your children is even before they are born. Despite what society dictates, it is recommended to analyse the financial constraints of having children and then insulating yourself and your partner for the years of financial commitment you will be putting in.