5 Popular Child Education Planning Options – Compared
For most Indian parents, very few financial goals outrank planning for their child’s education. Over the years, this has led to the proliferation of numerous investment, savings and protection products aimed specifically at fulfilling this goal. However, not all of them are as efficient as they may come across, prima facie. Here’s a comparison between some popular child education goal planning options.
Ironically, ULIP’s lost their popularity after they underwent reforms in 2009, prior to which they were frighteningly costly – with some plans deducting as much as 70% of your first-year premium to pay it ahead as commissions! Even after reforms, ULIP’s remain a relatively costly product. They generally charge a fund management expense of 1.35%, along with premium allocation charges that are deducted every year. In trying to address two issues at once, they actually end up addressing neither one too effectively.
“Money Back” Plans
Traditional “Money Back” insurance plans aimed at your Child Education Planning goal should be avoided at all costs! To the untrained eye, they may actually appear quite attractive, as they provide ‘guaranteed’ sums of money at pivotal points in your child’s life. However, if you evaluate these numbers a little more deeply, you’ll discover that they provide very poor returns of only 4% to 5% per annum, while attaching a small and insignificant death benefit to the plan.
Sukanya Samriddhi Account (SSY) – applicable for girl children only
You can invest between Rs. 1,000 and Rs. 150,000 per year in your SSY account, and this amount is tax deductible under Section 80C. The SSY account will attract interest on the 10th of every month, and the moneys will be compounded on an annual basis. You’ll need to continue making the deposits for a period of 15 years, and the balance will continue to attract interest until the 21st year of your starting the account; at which point it will mature, tax-free. Alternatively, you may withdraw the entire balance, if you so desire, for her education purposes when your daughter turns 18, or when she gets married. The returns from this scheme are generally higher that the yield on government bonds. Presently, it stands at 8.3%. Although SSY returns are usually much better than other fixed income instruments, they should not be the only investment avenue that you select for this goal.
Traditionally, Indians have veered towards physical assets such as Gold & Real Estate for their goal-based investments, although the trend has been shifting in recent times. Gold Investments have lost some of their sheen over the past five years, and even die-hard fans of the yellow metal are starting to question its place in their portfolios. With the domestic price of gold not going up in the past 5 years, Gold ETF’s (Exchange Traded Funds) and Gold Funds operated by Asset Management Companies have fared even worse than physical Gold itself – a fact that is attributable to the costs involved in operating and managing these schemes. Ideally, one should avoid investing into gold for their children’s education for a simple reason – gold generally fares no better than inflation in the long run, whereas education costs escalate faster than the CPI inflation rate!
Mutual Fund SIP’s
With over 6,000 Crores per month now flowing into Mutual Funds Investments via the SIP (Systematic Investment Plan) route, they have become the top choice for many intelligent investors who are planning for their children’s education goal several years in advance. Mutual Fund SIP’s have the potential to deliver much higher long term returns than any of the above stated investment avenues, and should therefore be your top choice for planning your child’s education. Mutual Fund SIP’s ensure that you benefit from the power of compounding, helping you create a sizeable corpus for your children’s education planning goal. For best results, make sure you invest into aggressive funds such as mid cap funds, if you’ve got a 7 year plus time horizon at hand. You may also choose to couple your SIP with a simple term insurance policy if you’d like to protect your goal.