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The state of education in India has been substantially rising annually. Given the increasing fees of secondary and higher education, teaching itself has become a type of business rather than a necessity. Adding to this cost is inflation, if an MBA costs ₹25 lakhs form a premier institute, it will soon cost ₹35 lakhs, keeping the rising cost of education due to inflation in mind which stands at 7%-10%.
This can be a harrowing situation for average parents whose income patterns cannot match the rising cost of education for more than one child. The only solution is an alternate form of investment, a tax saving mutual fund.
A tax saving mutual fund is also known as an Equity Linked Savings Scheme. The nature of this scheme is to invest primarily in equities and equity related instruments from the stock market. This is highly beneficial as an ELSS plan provides a unique combination of equity linked market returns along with tax benefits as per Section 80C of the Income Tax Act, 1961.
An individual investor can claim a 3-fold exemption under an ELSS plan.
No tax on income earned from an ELSS below Rs. 1 lakh.
Deduction upto ₹1.5 lakhs under Sec 80C of the IT Act, 1961.
No tax on any of the dividends earned throughout the tenure of the scheme.
There is a minimum mandatory lock-in period of 3 years, this is the lowest lock-in period in comparison to any other tax saving instrument such as PPF or NSC. Also, there exists a long term capital gains tax of 10% on the income earned above Rs. 1 lakh post the lock-in period.
You can save upto ₹46,350 by investing in an ELSS plan even if you are in the highest tax paying bracket of 30%.
ELSS brings about a uniform investment pattern with respect to fund allocation. The reason so, because, the cash for these funds are received from a larger number of salaried and business professionals on a regular interval via systematic investment plans in comparison to large investment which are sourced from a small number of corporate or institutional investors.
Apart from ELSS, another investment option is a Unit Linked Insurance Plan. To help you understand better, we have highlighted a few differences between ELSS and ULIP.
A ULIP plan can comprise a maximum investment of 50-100% in equity related instruments whereas an ELSS plan can comprise of a 100% investment in equity.
The cost of a ULIP scheme is higher than the cost of investing in a mutual fund. The cost of a mutual fund is presented as an expense ratio. An expense ratio is the annual cost of operating the fund with respect to the assets under management for the same tenure. The expense ratio of an ELSS mutual fund plan for your child is no more than 2.5%. Also, if you buy from the fund house directly, the expense ratio is further reduced.
A ULIP provides insurance cover for the insured’s spouse and child in case of death. An ELSS mutual fund does not provide this facility. The purpose of the mutual fund is to provide returns only on the money which has been invested in the fund and are not responsible for payouts beyond the fund value in case of the death of the investor.
An ELSS has a minimum lock-in period of 3 years while most of the ULIPs have a minimum lock-in period is 5 years as prescribed by the insurance provider.
Both ELSS and ULIPs can provide sufficient benefits based on the investment horizon to be achieved with respect to a financial goal. If you have a long term investment horizon of 10-15 years, then it is better for you to invest in an ULIP as the equity exposure is limited. If your investment horizon is 5-10 years, you should opt for an ELSS scheme and book profits for the same. The proceeds derived for the profits can be further utilised to invest in short-term debt or insta-redemption funds. Remember, the longer the gestation period of the financial goal, the higher is the risk you can undertake as an individual investor.
The best method of investing in an ELSS plan is via a systematic investment plan. An SIP brings about the benefit of rupee cost averaging over the policy tenure. Also, an SIP is treated as a separate investment as the money is locked-in for a period of 3 years. But recently, a major portion of ELSS investment takes place in the form of lump sum amount right before the financial year. This is also because salaried workers are under the pressure of declaring their investments for tax saving.
One of the most preferred option is to select an ELSS plan for your child’s higher education along with a term plan or health insurance. The ELSS will provide capital appreciation along with tax benefits and will keep in mind the rising cost of education, the term plan will provide cover for yourself and family while a health insurance will take care of any unforeseen events and accidents for you and your family. All of these combined will provide a complete and comprehensive social security without having the need to diverge from your original financial goal.
The lock-in period of 3 years ensures that an investor remains invested for a long time. In case of other investment instruments where there is no lock-in, there is a general tendency among investors to withdraw in case they need it for an emergency, comfort or luxury. The lock-in period also provides substantial time to fund managers for checking if the investment is on track during times of an economic crises or financial meltdown.
Please suggest equity funds for children's higher education for 15 years?
You can invest in the following equity funds for your child’s higher education with an investment horizon of 15 years: Largecap - Invesco India Growth Opportunities or Mirae Asset India Equity Fund, Midcap - Mirae Asset Emerging Bluechip Fund, Smallcap - Reliance Small Cap Fund.
What is the best investment for child?
Keeping your financial constraints and your child’s ambition in mind. The best investment for a child should be a combination of a term plan and an ELSS. The term plan will take care of the insurance cover for your child in your absence while the ELSS will help you meet your child’s education finances.
Which is the best child insurance plan in India?
Here are the top 5 child plans to invest in 2018: Metlife College Plan, ICICI Prudential Smart Kid Premier Plan, SBI Life Smart Scholar Plan, Aegon Life EduCare Advantage and HDFC SL Young Star Super Premium.
How can I save money for the future?
There are numerous ways to save money for your future. You can start by saving small amounts from your salary on a regular basis for one year. Post one year, you can use your saved corpus to invest in a number of savings scheme such as a ULIP or an ELSS.
Which ELSS fund is best for girl child?
If you are looking for an investment scheme specifically for your daughter, you can opt for the Sukanya Samriddhi Yojana which caters to the needs of your daughter's higher education, marriage and financial independence.
Where should I invest to create my child's higher education fund?
You can invest anywhere between a combination of an ELSS, ULIP, Health or Term plans for your children's higher education fund.
How can I save tax and plan for my 1-year old child's higher education?
If you seek to save tax along with generating capital for your child’s higher education, an ELSS is a suitable option which provides both the benefits mentioned above.
Should you sell your ELSS after the 3-year lock-in is over?
The choice of selling an ELSS after a 3-years lock-in period is absolutely dependent on you. It is advisable to hold a particular fund for as long as you can in order to reap maximum benefits.