Reader Query:
I want to build an education fund of ₹20 lakh over the next 12 years for my child’s higher studies. I’m considering child insurance plans since they offer tax benefits and premium waivers in case of unforeseen events. But my wife feels they are costly and suggests SIPs in mutual funds instead. What’s the best course of action?
Expert Response:
You’ve taken a commendable first step—starting early. When it comes to building a long-term education corpus, time is your biggest ally due to the power of compounding. But it’s also important to make smart decisions about where and how you invest.
Let’s first talk about the protection aspect you’re concerned about. Many child insurance policies offer life cover along with investment, but they usually come with higher costs and lower returns. A better strategy is to keep insurance and investment separate. Start by securing your family’s future with a term insurance plan. Calculate the cover based on essential expenses and future financial goals like your child’s education.
Once that’s in place, you’re free to explore more efficient investment avenues—like the one your wife recommended. Systematic Investment Plans (SIPs) in mutual funds are a well-balanced, cost-effective route to wealth creation. Here’s how you can approach it:
Start with equity mutual funds and remain invested aggressively for the first 10 years. Assuming a long-term average return of 12% annually, a SIP of ₹7,700 per month could accumulate close to ₹17.8 lakh by year 10.
In the last two years, gradually shift your investments to more stable options such as fixed-income funds, arbitrage funds, or conservative hybrid funds. At an expected return of 6% during this period, your total investment could comfortably reach ₹20 lakh by the end of year 12.
But make sure your target amount factors in inflation. Education costs tend to increase faster than overall inflation. If you haven’t considered that already, it may be wise to revise your goal. Even better—top up your SIP by ₹1,000–₹2,000 a month to provide a safety cushion in case returns fall short or expenses rise unexpectedly.
On the tax front, there’s a strategic edge if you invest in your child’s name. By the time your child turns 18 and begins higher studies, they will be considered a separate taxpayer. This offers some advantages:
- Basic exemption limit for income tax, which might increase in the future.
- Tax-free capital gains of up to ₹1.25 lakh annually from equity investments.
- For debt-based investments, returns are taxed as per slab rates—but if your child has no other income, tax liability could be minimal on withdrawals up to ₹12 lakh under current laws.
In summary, opting for a term insurance policy along with SIPs provides better returns, lower costs, and far greater flexibility than bundled child insurance plans. It also ensures that your child’s education goals are financially protected while offering room to adapt as your situation evolves.
Staying disciplined and starting early gives you a strong head start—and you’re already well on your way.
Disclaimer: This content is intended for informational purposes only. The views shared are those of individual analysts or brokerage firms and not of Mint. Always consult a certified financial advisor before making any investment decisions.
