Best ways to invest a lump sum for your child’s future
If you are a parent looking to make a lump sum investment to build a corpus for your child’s future, this is a must read for you.
A lump sum investment can help you to achieve your child’s long-term goals. Once you have invested a sizeable amount, you can relax and let compounding do the rest. If you pick the right investments, the money will grow over the years. You will be able to build a sizeable corpus for your child’s education, marriage, and other needs.Learn how to mange your money & create wealth, Download your FREE eBook now
Start early, pick the right investments and use the power of compounding. Look for investments that offer the right combination of risk and returns. Consider your goals, age, risk tolerance and investment period before investing.
Think about how much money you will need to achieve each goal. Work backward from the target amount to determine how much money you need to invest now to reach it.
Choose suitable investments based on when you will need the money. Debt investments are safer and less volatile, but they offer lower returns. Equity investments provide higher returns but are volatile.
For short-term requirements, invest more in debt and less in equity. For long-term needs, invest more in equity and less in debt.
Let’s take a closer look at the best options for investing a lump sum amount for your child:
Dynamic equity mutual funds
They are also known as balanced advantage funds or dynamic asset allocation funds. They invest in a mix of equity and debt. The fund manager balances the asset allocation. The securities exposure usually ranges from 30% to 80% or even more.
Most dynamic equity funds ensure that equity and arbitrage investments remain above 65%. This allows them to qualify for taxation benefits applicable to equity mutual funds.
Long-Term Capital Gains (LTCG) tax @ 10% applies to capital gains of more than Rs.1.0 lakh in a year. LTCG tax applies after an investment period of one year.
Dynamic equity mutual funds are safer and less volatile than equity mutual funds. However, they also offer lower returns than them.
Equity-oriented hybrid mutual funds
They are also known as balanced mutual funds or aggressive hybrid mutual funds. They invest 65% – 80% of their assets in equities and equity-related instruments. The rest is in debt instruments. This helps them to qualify for taxation benefits as equity mutual funds.
LTCG tax @ 10% applies to capital gains of more than Rs.1.0 lakh in a year. LTCG tax applies after an investment period of one year.
Balanced mutual funds are less safe and more volatile than dynamic equity funds. However, they offer higher returns than them in the long term.
Equity multi-cap mutual funds
They are also known as diversified equity mutual funds. They invest at least 65% of their assets in equities and equity-related instruments. Multi-cap funds invest across the large cap, mid cap, and small cap stocks.
LTCG tax @ 10% applies to capital gains of more than ₹ 1.0 lakh in a year. LTCG tax applies after an investment period of one year.
Multi-cap funds provide higher returns than hybrid mutual funds in the long run. However, the level of volatility and risk are also higher.
Debt mutual funds
Debt mutual funds invest in fixed income securities. Among them, Liquid funds, ultra-short funds, low-duration funds, and short duration funds offer more safety.
These funds invest in short-duration instruments with high ratings. They are safer than funds that take duration calls or invest in bonds with low credit ratings.
LTCG tax @ 20% with indexation applies after three years. This makes debt funds more attractive than bank fixed deposits. However, they don’t offer the same level of safety as fixed deposits.
Sukanya Samriddhi Yojana
This scheme provides for the education and marriage expenses of a girl child. The smallest investment allowed in a financial year is Rs.250, and the largest is Rs.1.5 lakhs. You can invest for 15 years. The account matures on completion of 21 years.
Contributions to this scheme get a tax benefit of up to ₹1.5 lakhs per year under Section 80C of the Income Tax Act. Besides, the interest earned and maturity amount are also exempted from tax.
It is popular because it offers higher returns than other small savings schemes. It is also exempted from tax.
Public Provident Fund (PPF)
PPF investments can be part of the debt allocation of your portfolio. This is a good option if you are looking for a safe investment that offers tax-free returns. PPF has a lock-in period of 15 years, so it is not as liquid as a hybrid mutual fund.
PPF investments of up to Rs.1.5 lakhs per year get a tax benefit under Section 80C of the Income Tax Act.
PPF returns are not as attractive as those offered by hybrid mutual funds. However, PPF is much safer and less volatile than hybrid mutual funds. It also provides tax-free returns.
Gold has a high emotional value. It acts as a hedge against stock market volatility and inflation. It also serves as a hedge against any political, economic or currency crisis. You can wear gold jewelry and pass it on to your children when they marry. However, investing in physical gold involves a storage risk.
You can avoid this by investing in gold Exchange Traded Funds (ETFs) or Sovereign Gold Bonds (SGBs). SGBs offer a high level of safety and are redeemable at the prevailing price of gold at the time of maturity. However, gold provides a low return, so it should not constitute more than 10 – 15% of your portfolio.
Bank fixed deposits
They are also known as term deposits and offer the highest level of safety with no volatility. Investors get a fixed rate of return for the entire period of the investment. However, the rate of return may not even beat inflation, and the income is taxable.
Fixed deposits are subject to Tax Deducted at Source (TDS) @ 10%. This applies if the interest exceeds Rs.10,000 in a year (Rs. 50,000 for senior citizens). Those whose income is less than the taxable limit can submit Form 15G / Form 15H. This will prevent the deduction of TDS.
Post-tax returns are not attractive, and this is not the right option to build a large corpus in the long term.
It’s best to avoid traditional insurance policies. They offer low returns and insufficient coverage. Real estate investments have a high emotional value. However, they have high transaction and recurring costs and offer low liquidity.
Define your goals and how much money you will need to achieve each of them. Have different investments for each purpose. Determine the right combination of debt and equity investments. Think about your goals, age, risk tolerance, and time horizon. Your investment decisions can have a massive impact on the future well being of your child.