With education cost inflating at an above-normal rate – 10 per cent, it is important for you to make sure that the returns on your child savings plan outpace inflation.
Written by Vivek Jain
Over the last two decades, India has undergone massive industrial as well as economic development. This is an important reason why the share of Foreign Direct Investment (FDI) during this period has increased by multiple folds. This opportunity is being used to the maximum by not just Indians but Non-Resident Indians (NRIs) as well to invest their money in the Indian market and earn great profits.
Some of the important reasons why NRIs are keen on investing in the Indian market are first; India currently claims to be the world’s fastest-growing major economy with a GDP growth rate of 9 per cent that makes it an investment hotspot of the investors with a horizon of 15–20 years. Second, cost rationalisation followed by an uptick in demand has given the economy a much-needed boost. Third, India is on the cusp of a longer-term earnings recovery cycle with earnings growth expected to be around 25 per cent.
Cost of education in foreign lands
In most western countries, a four-year undergraduate program costs on average $40,000-$50,000 per year, excluding miscellaneous expenses. Considering miscellaneous expenses like accommodation, living costs, and flights, the sum would reach $70,000 for a single academic year. This is about five times higher than what it was 8 to 10 years ago. With a rise in demand, it would be true to assume that the fees are most likely to increase further in the years to come. This eye-watering cost is just enough to make you wonder if you will ever retire.
One-time expenses like a child’s education and marriage are often an important reason why many parents stop planning for their retirement despite concerns that they may outlive their nest egg. Planning for children’s education and self-retirement needs to be mutually exclusive. In fact, planning for your children’s needs will lead to more sustainable outcomes. Moreover, when you plan for your child’s future at the right time, you are least burdened financially.
Finding the right solution
With education cost inflating at an above-normal rate – 10 per cent, it is important for you to make sure that the returns on your child savings plan outpace inflation. However, even before you start investing in a child plan, the most important thing to do is have a plan in place. You must set a target amount that you would need to fund your child’s education in the next 15–20 years. Once you have estimated the requirement, figure out how much amount you would need to invest every month to accumulate the required corpus. For instance, by investing Rs 40,000 per month i.e. $530 over 10 years, you will approximately get Rs 4 crore – $5.3 lakh after 20 years assuming an estimated interest rate of 13 per cent per annum – basis 7 years past performance.
Child investment plans to the rescue
One of the biggest advantages of investing in child plans in India is that they come with a unique in-built feature – Waiver of Premium. This amazing feature ensures that your child’s future is secured, even in your absence. As per the waiver of premium feature, on the sudden death of the policy proposer, the family receives a life cover – 10 times the annual premium – as a lump sum in order to meet immediate expenses. In addition, the policy continues as earlier with all future premiums paid by the insurer and on maturity, the fund value is paid directly to the child. Under few child plans, the child even receives monthly income to meet the regular/everyday expenses like school/tuition fees.
You may consider investing in market-linked child plans – ULIPs to ensure that your child gets the required amount at the desired age. The equity fund option under ULIP based child plans is the best way to reap optimum benefits over the long term. The returns on market-linked products usually range between 14 per cent – 18 per cent. Additionally, these plans even allow systematic partial withdrawals to meet the child’s key milestones. Apart from ULIPs, customers even have the option of investing in Child Capital Guarantee Solution – a convenient, transparent, and cost-effective way to plan for your child’s future. These plans allow you to earn upside of marked linked returns with zero risk to the capital invested. The life cover in these plans start from Day 1 is equivalent to 10–15 times the annual premium. The biggest advantage of Child Capital Guarantee Solution is that the investment is 100 per cent secure as upon completion of the policy term, the customer gets back all the premiums invested – safeguarding the investments even in case of the economic down term. The returns on these plans usually vary from 12 per cent – 14 per cent.
Yet another prominent option of investing money for your kid’s financially secure future is Guaranteed Return plans. Under these plans, you can lock in the rate of interest for 15–20 years and cater to reinvestment risk that is not possible in other savings products like bank fixed deposits. Guaranteed Return plans promise assured payout at various milestones. For instance, by investing Rs 5 lakh every year for 10 years, you get Rs 1, 25,000 every year from 2nd year to take care of your child’s school fees and get Rs 7,13,710 every year for the next 10 years to support kid’s higher education, marriage, etc. Most importantly, returns on Guaranteed Return plans are tax-free, unlike bank fixed deposits where you may have to pay up to 30 per cent tax on the maturity amount.
The author is Head-Investments at Policybazaar.com. Views expressed are that of the author.
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