Children’s Day: From PPF to real estate, 8 investment options you can choose from, for your child

Children’s Day provides an excellent occasion to reflect on ensuring the lasting financial well-being of our children. Rather than gifting your children expensive items that may not be of use for too long, leverage this day to initiate plans for their education, marriage, and other significant life milestones. Relying solely on saving money in a bank account might not suffice to safeguard your child’s financial future. The impact of inflation can gradually diminish the value of your savings. Moreover, given the generally low interest rates offered by banks, the growth of your money may be relatively slow.

Instead, parents must opt for appropriate investment avenues that facilitate the growth of their money over time. The question that then arises: where should one invest to fulfill the financial needs of children? Some commendable investment choices for children encompass:

Public Provident Fund (PPF)

The Public Provident Fund (PPF) stands as a long-term savings and investment initiative in India, initiated by the National Savings Institute of the Ministry of Finance back in 1968. The primary aim of this scheme is to encourage small savings by providing an investment avenue with reasonable returns, coupled with income tax benefits.

PPF accounts can be initiated by any Indian citizen, including minors, at any post office or authorised bank branch. The minimum deposit amount is ₹500 per financial year, while the maximum deposit amount is ₹1.5 lakh. Depositors have the flexibility to opt for monthly, quarterly, or half-yearly installments.

The government determines the interest rate on PPF deposits every quarter. The current interest rate stands at 7.1 percent per annum. The interest is compounded annually, meaning that the interest earned is added to the principal amount at the end of each financial year. Subsequently, the interest is calculated on the new principal amount in the following financial year.

Investing in PPF presents an excellent choice for securing children’s financial futures, offering several advantages, including:

• Guaranteed returns: PPF ensures a fixed interest rate, presently at 7.1 percent per annum. This rate surpasses those provided by most banks for savings accounts and fixed deposits.
• Tax benefits: Contributions to PPF are tax-deductible up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. Furthermore, the interest earned on PPF is exempt from taxation. However, investing in your minor’s name will not yield you the desired tax benefits. 
• Long-term investment horizon: PPF accounts come with a minimum tenure of 15 years, extendable in blocks of five years indefinitely. This characteristic makes them a favourable choice for long-term financial objectives, such as funding your child’s education or marriage.
• Government-backed: PPF stands as a government-backed savings scheme, ensuring a high level of safety and security for investors.

Here are some guidelines for utilising PPF to ensure your child’s financial well-being. 

• Initiate a PPF account early: Open a PPF account for your child as soon as possible. This early start provides their investment with more time to accumulate and grow.
• Regular contributions matter: Make consistent contributions to your child’s PPF account. Even modest monthly investments can accumulate significantly over time.
• Consider lumpsum deposits: Explore the option of making a lump sum deposit at the beginning of the financial year when investing in PPF. This strategy enhances the opportunity to earn maximum interest.
• Nomination for non-minor children: If your child is not a minor, contemplate assigning a PPF nomination to them. This ensures that the funds in their PPF account are transferred to them in the event of your demise.

Sukanya Samriddhi Yojana (SSY)

The Sukanya Samriddhi Yojana (SSY) is a government-supported savings initiative specifically tailored for female children. Introduced in 2011 as part of the Beti Bachao Beti Padhao (BBBP) campaign, the scheme’s primary aim is to motivate parents to save for the future well-being of their daughters.

SSY accounts can be initiated by any Indian citizen, including minors, at post offices or authoribed bank branches. The minimum monthly deposit is ₹250, and the maximum annual deposit is ₹1.5 lakh. Deposits can be made through cash, cheque, or demand draft.

The government adjusts the interest rate on SSY deposits quarterly, with the present rate standing at eight percent per annum. The interest is compounded annually, indicating that the interest earned is added to the principal amount at the conclusion of each financial year, and the subsequent year’s interest is calculated on the new principal amount.

SSY accounts are designed for a minimum tenure of 21 years or until the girl child reaches 18 years of age or gets married. Premature closure of the account is possible in the unfortunate event of the girl child’s death or if she experiences physical or mental disabilities.

Here are some guidelines for utilising SSY to ensure the financial well-being of your child. 

• Initiate an SSY account for your daughter at the earliest opportunity to allow her investment more time for growth. Consistently contribute to your daughter’s SSY account, even if the monthly investment is modest, as it accumulates over time. Explore the option of a lumpsum deposit in SSY at the start of the financial year to maximise interest earnings.
• If you have multiple daughters, consider opening separate SSY accounts for each of them. Maintain the SSY account until the girl child turns 18 or gets married. Inactivity for over 15 years will result in account closure, requiring a penalty payment for reactivation.
• SSY proves to be an excellent investment for girls’ futures, offering a high-interest rate, tax benefits, a long-term investment horizon, and government support. By adhering to the provided tips, you can effectively utilise SSY to secure your child’s financial future.

Here are some supplementary particulars about SSY:

• The account holder can be the parent, guardian, or any other adult responsible for the girl child.
• The girl child’s name must be explicitly mentioned in the account title.
• The account can be initiated at any post office or authorised bank branch within India.
• The account number is a 12-digit combination that commences with the letters “SSY”.
• An annual account statement is dispatched to the account holder.

To initiate an SSY account, you must provide the following documents:

• Proof of identity for the account holder
• Proof of address for the account holder
• Proof of the relationship between the account holder and the girl child
• Proof of the girl child’s birth

Alternatively, you have the option to open an SSY account online through the National Savings Institute website.

Unit Linked Insurance Plans (ULIPs)

Unit Linked Insurance Plans (ULIPs) are insurance products with an investment component, providing both insurance coverage and investment opportunities. Policyholders allocate a portion of their premium to market-linked funds, and the returns are contingent on the performance of these chosen funds. ULIPs come with various additional advantages, such as

• Investment and insurance: Combining investment and insurance, ULIPs provide parents with the opportunity to grow their savings by investing in various funds while securing life insurance coverage for their child. 
• Long-term investment horizon: With a typical long-term investment horizon and a lock-in period of 5-10 years, ULIPs prove advantageous for saving towards a child’s future goals, such as education or marriage.
• Flexibility: ULIPs offer flexibility in fund selection and premium payment, allowing parents to tailor their investments based on risk appetite and financial objectives. 
• Tax benefits: Premiums paid for ULIPs are eligible for tax deduction under Section 80C of the Income Tax Act, enabling parents to reduce their taxable income through these investments.

Nonetheless, it’s crucial to recognise that ULIPs come with a level of complexity involving various fees and charges. Before opting for a ULIP for their child, parents should thoroughly assess their financial goals and risk tolerance. Here are some guidelines for selecting a ULIP for your child.

• Compare various plans: Before finalising a ULIP, assess plans from different insurance companies. Take into account factors like the lock-in period, fees, charges, and fund performance to make an informed decision.
• Select the appropriate fund: Align your choice of fund with your risk tolerance and financial objectives. If uncertain, seek advice from a financial advisor.
• Consistent investments: Even with modest monthly contributions, regular investing can accumulate significantly over time.
• Regular policy review: Periodically review your ULIP policy to ensure it aligns with your evolving needs. Adjustments, such as switching funds or modifying premium payments, may be necessary as your child’s requirements change.

To start with, ULIPs can serve as a favourable investment option for children. However, it’s imperative to thoroughly assess your financial goals and risk tolerance before committing to a ULIP for your child.

Mutual funds

Mutual funds represent an investment category where funds are collected from numerous investors to acquire a diversified portfolio of securities. They present a beneficial avenue for saving towards a child’s future aspirations, be it education or marriage. By investing a modest sum each month, parents can witness the growth of their investment over time. Furthermore, mutual funds come with tax advantages, enhancing their appeal as an investment option for parents. Investing in these funds provides a multitude of benefits, including:

• Diversification: Mutual funds allocate investments across various assets like stocks, bonds, and money market instruments, mitigating the risk associated with the underperformance of any single investment.
• Professional management: Experienced professionals manage mutual funds, making decisions on the selection and management of investments on behalf of investors.
• Long-term growth potential: Mutual funds offer the potential for higher returns over the long term compared to traditional savings products such as savings accounts and fixed deposits.
• Convenience: Mutual funds are user-friendly in terms of both investment and management, providing a range of options for purchases and sales.
• Liquidity: Mutual funds are liquid investments, allowing investors to quickly and easily convert their holdings into cash.

Consider these guidelines when investing in mutual funds for children:

• Commence early: Initiating investments early provides your money with more time to grow.
• Consistent investments: Even with modest monthly contributions, regular investing can accumulate significantly over time.
• Select appropriate funds: Align your choice of fund with your risk tolerance and financial objectives. Seek guidance from a financial advisor if uncertain.
• Regular portfolio rebalancing: Periodically rebalance your portfolio by selling some of the successful investments and increasing holdings in underperforming ones to maintain your desired asset allocation.
• Maintain composure and avoid panic selling: Although the stock market may exhibit short-term volatility, it has historically shown an upward trend over the long term. Resist the urge to panic sell during market downturns.

National Savings Certificates (NSCs)

The National Savings Certificate (NSC) stands out as a favoured choice for conservative investors, offering low risk and assured returns. Being a government-backed scheme, it carries no risk of default. Additionally, NSCs provide tax advantages under Section 80C of the Income Tax Act, 1961.

Here are some key features of NSCs:

• Interest rate: The prevailing interest rate on NSCs is 7.7 percent, compounded annually. This rate is determined by the government and undergoes quarterly revisions.
• Investment period: NSCs have a fixed maturity period of five years. However, premature withdrawal is permissible after one year, albeit with a penalty.
• Minimum investment amount: The minimum investment required for NSCs is ₹100, with no specified maximum limit.
• Eligibility: NSCs are open for investment to any Indian citizen, either individually or jointly. However, non-resident Indians (NRIs), Hindu Undivided Families (HUFs), and trusts are ineligible for NSC investments.

Individuals, including minors aged ten and above, have the option to invest in an NSC. Legal guardians or parents can also invest on behalf of a minor child. Presently, the NSC scheme is available in two modes: electronic mode (e-mode) or passbook mode. These can be acquired from public sector banks, specific authorised private banks, or post offices. For those with a savings account at an authorised bank or post office, the NSC scheme can be conveniently purchased online in e-mode, assuming internet banking is activated.

Fixed deposits (FDs)

Fixed deposits (FDs) are widely favoured as an investment choice in India owing to their assurance of guaranteed returns and low risk. Available through numerous banks and financial institutions, investors have the flexibility to select the tenure and interest rate that aligns with their specific requirements. Here are several advantages associated with investing in FDs:

• Assurance of returns: FDs provide a guaranteed return at a fixed interest rate, offering investors a clear understanding of their earnings upon maturity.
• Low risk: FDs represent a low-risk investment choice since they are supported by the bank or financial institution.
• Liquidity: Investors have the flexibility to withdraw their funds prematurely from FDs, albeit with a penalty.
• Tax advantages: For investments in FDs, investors can avail themselves of tax deductions of up to ₹1.5 lakh under Section 80C of the Income Tax Act, 1961.

FDs generally offer lower interest rates compared to alternative investment vehicles like equity mutual funds.

Gold investments

Gold emerges as a favoured investment choice for children due to its reputation as a secure and enduring asset that tends to appreciate over time. It is available in diverse forms, such as jewellery, coins, bars, gold mutual funds, exchange-traded funds (ETFs), and sovereign gold bonds (SGBs). Here are some advantages of including gold in a children’s investment portfolio. These include:

• Safe and dependable: Gold, with its historical stability, is a dependable asset that has consistently retained its value. This quality makes it a suitable long-term investment for children, offering growth potential over time.
• Inflation hedge: Gold is often regarded as a hedge against inflation, as its value tends to increase when the prices of other goods and services rise. This characteristic helps safeguard children's savings from the eroding effects of inflation.
• Tangible asset: Being a tangible asset that can be physically held and touched, gold holds a unique appeal for certain investors compared to less tangible investments like stocks and bonds.
• Diverse investment options: Gold provides a range of investment avenues, offering investors flexibility. Options include investing in physical gold such as jewellery, coins, or bars, as well as in paper gold through gold mutual funds, ETFs, or SGBs.

You have the option to apply for SGBs on behalf of your minor child. However, the application must be submitted by the guardian through the branch. The guardian is required to furnish an SGB application form along with a copy of their Permanent Account Number (PAN) details. 

Putting money in gold ETFs and SGBs is preferred as opposed to investing money in physical gold. Many financial planners recommend limiting the allocation of gold to no more than 10 percent of an investment portfolio. This precaution stems from gold being a non-productive asset, lacking the ability to generate income or dividends. Furthermore, given its short-term volatility, it is crucial to diversify an investment portfolio by including various asset classes.

Investing in real estate

Real estate stands out as a viable long-term investment avenue for children, offering the potential for capital appreciation and the possibility of a consistent rental income stream. Nevertheless, it is crucial to thoroughly evaluate the advantages and disadvantages before reaching an investment decision. Moreover, these investments can offer children financial stability in the future. Opting to reside in the property can result in savings on rent. Alternatively, selling the property can furnish them with proceeds to support their retirement or other financial objectives.

In India, numerous investment choices cater to children. To harness the power of compounding, parents should select an investment option aligning with their financial objectives, risk tolerance, and time horizons. Furthermore, those new to investing should seek guidance from a financial advisor to receive personalised advice when selecting the most suitable investment option for their child.