Which investment option is the best for your child's future?

Remember Farhan Qureshi in the 3 Idiots? His father planned out his education and career the day he
was born. The senior Qureshi's career choice may have been out of sync with his son's passion for
wildlife photography but the underlying objective to secure the financial future of his childwas bang
on target.

An increasing number of Indian parents is doing that today. In an online survey conducted by
economictimes.com for ET Wealth last week, 63% of the 1,908 respondents said they started saving for
their children's education when they were born. Another 9.2% had started even before the kid was born
(see graphic).
That's good news, because the earlier you start, the more the time available for your investments to grow,
and the bigger the corpus.
But are Indians choosing the right options when investing for their children? Here's the bad news. An
overwhelming majority is opting for low-yield instruments. Almost 45% of the respondents in our survey
said they invest in the Public Provident Fund (PPF) and fixed deposits for their children.
Another 38% have invested in traditional insurance policies. "Despite the numerous options available,
Indian parents continue to rely on bank fixed deposits due to lack of awareness," says Ashu Suyash,
country head, Fidelity International.
The encouraging part is that 43% also invest in equity mutual funds and stocks for their children, while
26% have opted for child insurance plans that provide for the education of the child if the parent is no
more.
The skew towards low-yield products also means that many Indian parents might fall short of the targets
they have set for their children's investments. ET Wealth estimates that raising a child in urban India from
cradle till college costs roughly Rs 55 lakh. ( Downloadable file: How much it costs to raise a child )
The calculation assumes that the child will take up a professional course costing Rs 10 lakh. This is the
cost at today's prices and the amount has to be adjusted for inflation. Now comes the scariest part.
Education costs, which constitute nearly 46% of the total expense on a child, are growing at a worrying
pace of 20-25% per year.

Formulating a strategy
Fortunately for parents, there are enough investment products to help them fulfill the dreams for their
children. Chosen appropriately, these options can help you save enough to send your daughter to the
best medical college in the country, or book a ritzy 5-star hotel for your son's wedding.
How does one choose the right product? The first thing to understand is that there is nothing to
differentiate the investments made for children from the rest of your portfolio.
They are exposed to the same risks, offer the same returns and are taxed at the same rate. No mutual
fund will give units at a discount or offer guaranteed returns just because a parent is saving for his child.
No bank will offer you a higher interest rate.
No insurance company will charge a lower premium. The taxman too will not exempt any income. So, the
same rules that govern your own investments should apply to those made for your children.
Your choice should depend on four basic factors: the tenure of the investment, the risk you are willing to
take, the returns offered by the option and the taxability of the income. Here's how these four factors can
affect your investments.
Tenure of investment
Are you saving for your daughter's education? Or for your son's marriage? Financial planners say it is
best to define your goals and segregate the investment for each goal.

"Since each goal has a different time frame, separating them will allow the parent to choose the most
appropriate investment to reach that goal," says Pune-based financial planner Gaurang Gandhi.
The stock market has historically been the best place to park your money for the long term. There are
enough studies to prove that equities give the highest returns in the long term.
"Don't invest in a long-term fixed deposit for your daughter's education when she is just a toddler. The
money that is not going to be touched for a long period should ideally be in equities," says P.V.
Subramanyam, a financial trainer at Iris.
For many parents, defining a goal that is 15-20 years away is not easy. Hyderabad-based Srinivas
Vinjamuri and his wife Pratyusha are investing for their one-year-old daughter's education and marriage,
but have not earmarked funds separately for the two goals.

"Right now, we are just putting money in a mix of balanced and equity mutual funds," says the manager in
an MNC. That might work fine for the Vinjamuris right now as their first goal is at least 15-16 years away,
but eventually, they will have to plan for each expense separately.

Every individual has a different risk appetite. Equities are certainly a great option for creating wealth over
the long term, but what good is this money if it leaves you tossing and turning in bed, agonising over how
your investments are faring.
So choose an option that suits your risk tolerance. For this, first get your risk profile assessed by a
financial planner.

In many cases, one does not even know how much risk he can take. "Most parents adopt a very
conservative approach when it comes to investing for their children. This attitude is rooted in the choices
their parents had made and is difficult to shed," says Bangalore-based financial planner Anil Rego.
As the table shows, the higher the risk you are willing to take, the higher your returns could be.
Then again, your ability to take risks depends on the time available. As we mentioned earlier, stocks and
equity funds work best for long-term goals. However, if you are saving for your son's marriage in 2013,
steer clear of volatile stocks and put the money in a debt fund, or even a fixed deposit.

Taxability of income
Keep in mind the income tax rules that apply to your investments ( Check Seven tips to save income tax
on investment for children ). Your child's income is actually your own. This is also the reason why PPF
and insurance policies are so popular with investors.
The income from these options is tax-free, but there are other tax-efficient options as well. For instance,
the income from equity and equity-oriented mutual funds is tax-free after a year. Investments in other
funds can help you defer tax for years, even decades.

When you take into account these factors, the investment portfolio for your child becomes a mix of short-,
medium- and long-term products. Each option has something to offer, some financial goal to achieve (see
graphic). Fixed deposits offer safety and assured returns but won't be able to beat inflation.

Mutual funds offer high growth but carry a risk and don't offer any insurance cover. Child insurance plans
offer an insurance cover and help the wealth to grow but levy high charges. Gold helps fight inflation but
doesn't offer diversification.