Which investment options are available other than mutual funds to fund your children’s higher education?

The tagline “Mutual Funds Sahi Hai” has seemed to catch the fancy of many investors with many of them even planning their children’s education around mutual fund investments. However, despite all the high returns that some of these funds yield does it make sense to rely on them alone? The answer is a big “No” as investments for children necessitate a detailed consideration of how much money you would need to fund their education coupled with the investment horizon and your understanding of market risk. Also, children-specific mutual funds can be a viable option though experts suggest that there are better alternatives for parents to plan for their children’s future.

Start with buying life insurance

Parents planning their funds to pay for their children’s future education must first consider buying a life insurance policy. Buying life insurance as a means to fund your children's education aspirations can be a reliable strategy, guaranteeing they have the financial means to pursue their education even in your absence. Nonetheless, it is crucial to thoroughly comprehend the advantages and potential risks associated with this approach before making a final decision.

Purchasing life insurance to support your children's education goals offers several advantages:

• Peace of mind: Knowing that your children will be financially secure in the event of your passing can bring you peace of mind.
• Guaranteed funds: A life insurance policy ensures a guaranteed sum of money for your children, regardless of fluctuations in the stock market or other investment markets.
• Tax benefits: The premiums you pay for the life insurance policy may be eligible for tax deductions, and the death benefit may be exempt from income tax.

However, before you rush to buy a life insurance policy, estimate how much money your ward(s) to pursue their higher education. Find out the education cost and then calculate its future value after considering inflation.

Take, for example, the current cost of education is Rs 25,00,000. At the current inflation rate of seven per cent per annum, the future cost of education after 15 years would amount to Rs 68,97,579.

There are other costs also to be included, which means that you must opt for an insurance policy coverage amounting to at least Rs 1 crore.

Put money in a PPF account

How many parents are aware that they can open a Public Provident Fund (PPF) account in the names of their minor children too? Investing in a PPF account benefits investors by allowing them triple exemptions (EEE) during investment, returns earned, and while crediting the maturity value to their savings accounts.

The long-term investment proposition means that investors can benefit from the compounding effect for 15 straight years or more, thus, allowing them access to a decent, lump sum corpus.

Take, for example, you invest Rs 1,50,000 every year for the next 15 years in a PPF account opened in your child’s name.

Annual Investment Amount: Rs 1,50,000

Interest Rate: 7.1% per annum

Investment Tenure: 15 years

translates to

PPF Maturity Amount: Rs 40,68,209

However, if you continue to invest in the PPF account for 20 long years to avail of an increased corpus for your children’s higher education

Annual Investment Amount: Rs 1,50,000

Interest Rate: 7.1% per annum

Investment Tenure: 20 years

translates to

PPF Maturity Amount: Rs 66,58,288

Allocating money to a VPF account

The Voluntary Provident Fund (VPF) is an optional investment made by salaried employees in addition to the Employees Provident Fund (EPF). Its primary benefit lies in being a government-backed savings scheme with low risks and the potential for high returns.

The VPF account allows contributions beyond 12 per cent of an employee’s EPF contribution. The maximum contribution can go up to 100 per cent of the Basic Salary and Dearness Allowance. The interest earned is at the same rate as the EPF. One of the notable features is that once the contribution amount is selected in the VPF, it cannot be terminated or discontinued before completing a base tenure of five years. This provision encourages investors to remain invested for an extended period.

Take, for example, if you decide to contribute Rs 10,000 every month to your VPF account earning 8.15 per cent interest per annum for 15 long years.

Invested Amount: Rs 18,00,000

Estimated Returns: Rs 17,30,558

Total Returns: Rs 35,30,558

However, if you continue to invest in the VPF account for 20 long years to avail of an increased corpus for your children’s higher education

Invested Amount: Rs 24,00,000

Estimated Returns: Rs 36,41,978

Total Returns: Rs 60,41,978

The VPF falls into the EEE category, which means it enjoys tax exemptions on contributions, the principal amount, and the interest earned. This makes it an excellent tax-saving option. Additionally, it aids employees in building a substantial savings portfolio, which can be beneficial during significant life milestones.

Opting for a ULIP for dual benefits

Unit Linked Insurance Plans (ULIPs) are insurance plans that combine life insurance with investment options. This unique feature allows you to safeguard your child's education savings in the event of your death or disability, while also providing opportunities to invest for potential growth.

Investing in ULIPs offers numerous advantages for parents who are saving for their child’s education, including:

• Life insurance: With a ULIP in place, you get life insurance coverage, ensuring financial protection for your child in case of any unfortunate circumstances.
• Investment opportunities: ULIPs allow you to invest your funds in various asset classes, such as equity, debt, and money market instruments. This diversified approach can aid in the gradual growth of your child's savings.
• Tax benefits: Investments made in ULIPs qualify for tax deductions under Section 80C of the Income Tax Act, 1961. You can claim a deduction of up to Rs. 1.5 lakh on your ULIP investment, reducing your taxable income.
• Flexibility: The ULIPs come with a range of features, including the ability to choose your preferred investment options, make partial withdrawals, and even surrender the policy if needed. This level of flexibility allows you to customize your investment according to your specific requirements.

Nevertheless, it is crucial to acknowledge that ULIPs come with certain risks, such as:

• Market risk: If the stock market performs poorly, the value of your ULIP investment may decrease.
• Charges: The ULIPs entail various charges like fund management fees, mortality charges, and administrative fees. These charges can impact your overall returns.
• Lock-in period: ULIPs have a lock-in period, preventing you from withdrawing your money before its conclusion. This can pose a problem if you urgently require access to your funds.

Overall, ULIPs can be a favourable investment option for parents seeking to secure their children's future. However, it is essential to comprehend the associated risks before deciding to invest in a ULIP.

Planning for children’s higher education is not easy as it involves myriad factors including considering the effect of inflation, rising education costs, and fluctuating interest rates that help decide when, where and how much money to invest to achieve the desired financial goals.