It is not uncommon for parents in the country to open a fixed deposit in the name of their child as soon as he/she is born. However, in following this routine practice, parents have forgotten that before making any investment, it is mandatory to verify the impact the fund will have with fluctuations in the rate of inflation of the country, their system of asset allocation, and other criteria, leading to mismanagement of funds in the future. The account, especially if it is a PPF account may be subject to a variety of terms and conditions that may influence your spending and saving pattern in the future. You may also end up losing out on your retirement planning, as you continue to make futile attempts to save funds for your child’s future.
Interests on fixed deposits are not exempted from taxation, and are thereby subject to full rates of taxation. It is thereby not advisable to invest in fixed deposits for your child as taxes are charged not just on the interest that has been earned, but also in accordance with the income of the parent that is the highest earner of the family, which in turn reduces your overall returns. Thus, there is no denying that these schemes are completely inefficient in the matters of tax efficiency while saving funds for your child. Moreover, if inflation rates continue to rise at the current rate, then your funds will lose their value over a period of time and you will end up not making any money on your funds. You need to comprehend the impact of inflation on your corpus, even when you are saving funds in the name of your child. In order to combat all such issues, it is advisable to maintain a considerable amount of your portfolio in equity investments. You can also opt for hybrid schemes where your investment is distributed across equity and debt-related instruments. If you are in for the long haul, then this manner of investment is especially beneficial for your investments. Moreover, under a Monthly Investment Plan or an MIP, there is no restriction on the amount of money you can save in the name of your child on a regular basis. In addition to this, you will not be subject to any form of taxation until and unless you withdraw your investments from the fund. Instead of fixed deposits, replace your portfolio with profitable MIPs instead. They will assure better gains and safety to your investments.
Do not completely do away with fixed deposits either and dedicate a tiny portion of your corpus towards them in your portfolio. You can still attain tax free returns from fixed deposits while investing in your child’s name, particularly if you have two children in your family. The main aim of investing is to create sufficient corpus for your child so that you needn’t opt for a personal loan or any other type of loan to bridge the gap between your child’s dream and your finances. Opt for modes of investments depending on your requirements and the time period, during which you would like to invest. While fixed deposits are highly beneficial to realize short-term goals, you can direct your corpus towards them if you are realizing any goal which is set out in the near future. Otherwise, opt for debt funds that are quite tax efficient alternatives as compared to fixed deposits. Invest a large chunk of your portfolio in them if you are seeking to invest for a long period of time, in order to realize long-term goals for your child. Remember that diversification is the primary key that is important for the success of any fund. While handling funds for your child, remember to conduct adequate research before settling for any type of scheme.