For a long-term goal, such as investing for your child’s higher education or planning for your retirement, our advice remains bullish on equities. But one debt product that always remains a favourite to lend stability to your portfolio, without compromising on returns, is the state-guaranteed Public Provident Fund (PPF).
However, some investors are finding it difficult to open a PPF account in the name of their minors. We asked India Post, that offers the product, if banks were notified to do so and this is what the official had to say: “An adult can open a PPF account in the name of his minor from either a post office, some nationalized banks like the State Bank of India, Punjab National Bank, Central Bank of India, Syndicate Bank and private banks like HDFC Bank and ICICI Bank.”
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The reason that some banks are not happy about opening a PPF account for your child could be the extra work for a small amount. Says Harsh Roongta, CEO, ApnaPaisa.com: “It depends on the bank branch and is not a practice across banks. Some banks that do refuse say that opening an account in the name of the minor is unnecessary because an individual can only invest up to Rs70,000, including that of his minor’s.”
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With that bit out of the window, there is a good reason why you should hurry and open a PPF account in the name of your child. It is the only long-term debt instrument that offers a guaranteed risk-free return of 8% and the way it is structured makes for discipline investing.
More on PPF
You can open a PPF account in your name and in the name of each of your children individually. However, you cannot exceed an overall investment limit of Rs70,000 between you and the kids. This means that you need to apportion money so that the total does not exceed Rs70,000. Investment can only be made in multiples of Rs500. Investments in PPF also give tax deduction benefit under section 80C of the Income-tax Act. The proceeds are tax-free.
PPF works like an annual or a monthly systematic investment plan (SIP). You need to invest some amount in the account every year (you can do so 12 times a year). It comes with a lock-in of five years. The option of partial withdrawal is available from the end of the fifth year. From the sixth year, you can withdraw up to 50% of the amount lying in the account at the end of the fourth year preceding the year of withdrawal or at the end of the year preceding the withdrawal, whichever is lower.
If your bank refuses to open an account in the name of a minor, you can approach a post office or bump up your individual PPF account. But this would require discipline and a cultivated habit of refraining from dipping into your account for funds. If the account is in your name, you can nominate your child or spouse as the beneficiary. If the subscriber dies, the money in the PPF account would go to the nominees on or before maturity.
What should you do?
The power of compounding works magic and, therefore, we suggest you open a PPF account as soon as your child is born. Picture this. An MBA course that costs Rs6 lakh today will cost Rs15.92 lakh 20 years from now, assuming the rate of inflation is 5%. If you invest right away you will have to invest Rs34,788 every year, but if you wake up only when your child is five years old and joins school, you will have to invest Rs58,632 each year.
Amar Pandit, a Mumbai-based financial planner, says: “PPF is the one of the best long-term debt products that we recommend to our clients.”
Typically, there are two stages at which you will need a huge influx of funds: a good undergraduate college or a good masters. If you open a PPF account in the name of your child within the first year of his life, you will have a PPF account ripening when your child may be a couple of years from finishing school.
You will need to take a call at that point. You can either withdraw your funds completely and park in a short-term debt instrument, such as a good income fund or maybe a fixed deposit to meet the need of your child’s higher education. If you don’t need the cash immediately, we would recommend you extend the term by another five years—PPF can be extended in five-year batches—if the rates are still favourable. This may help you meet the need of your child for higher studies.
Says Pandit: “The return that PPF offers is by far the best. You must keep extending your PPF account if you do not have a pressing need and make partial withdrawals, if need be. A withdrawal of up to 60% of the maturity corpus is allowed during the extended tenure.”
PPF is an excellent investment tool and we recommend that you park at least 40% of your funds earmarked for your child in this instrument.