What is the best? PPF &/OR ULIP?
The Public Provident Fund (PPF) has been the first choice of most of the parents to secure their child’s future needs, especially education. Even the online survey results of The Economic Times showed that almost 45% of respondents opened PPF accounts for their kids.
Well, there are various benefits offered by PPF. First, it encourages discipline as you stay invested for a good 15 years. I have hardly seen any investor fiddling with the corpus before its maturity. Even, many investors keep extending it in blocks of five years after maturity. Second, it enjoys EEE (Exempt-Exempt-Exempt) tax benefits. The annual investment, the earned interest and the maturity amount, all are tax-free. And finally, it is considered to be a safe option as it is run by the government.
However, PPF alone can’t be a good choice to fund your child’s future needs. In my case, it was 12 years ago when my father used PPF amount to finance my master’s degree. But would the same PPF amount sufficient to meet education needs of my son 15 years down the line? The answer is No.
Inflation is a real devil
Consider this, 15 years back; the engineering course used to cost around Rs 10,000-30,000/year. Now today it costs anywhere between Rs 5 lakhs to 20 lakhs/year.
Source: The Economic Times
Of course, a tuition fee is not the only expense as there’s books, stationery, sports equipment, excursions, etc. An Assocham survey showed 65% parents spend more than half of their take-home salary on their kid’s education and extra-curricular activities, which are increasing twice as fast as the inflation rate.
What goes against PPF
It is believed that debt is safe to meet short -term goals (this is because the returns of debt instruments are low) while equity is a long-term investment. By this definition PPF, a debt product with a time horizon of 15 years, goes against the basic tenet of long-term investing.
The other argument against PPF is that interest rates are variable and in a falling interest rate scenario, it may look unattractive.
For 2016-17, the government has slashed interest rates on PPF to 8.1% from 8.7%. As inflation is on a rising spree, a cut in PPF rate means you might fall short of targets that you have set for your kid’s future.
So, does it mean that your child should let go of his or her aspirations? Or should you trim your expenses and lead a substandard lifestyle? Considering that education costs are only going to rise in future, you need to enrich your instrument portfolio to yield better returns in a long run.
How ULIP plans for child’s education can help
As it is said, tomorrow is determined by steps we take today, it is important to take correct steps while walking towards a financial goal. If you can stomach some risk, then you should park a portion of your money in child insurance plans which secure your goals against inflation. Some policies also go beyond and cover expenses incurred on extra-curricular activities, like music, dancing, etc.
Goals protection against untimely death of parents
Like any other parent, I always have one thing to worry about— what would happen to my child’s dreams in case I am no more? After all, India tops the list of countries with the most road traffic deaths. The answer to this question lies with ULIP child insurance plan like ICICI Pru Smart Kid.
In the case of your unfortunate death, all future premiums are waived off, and the insurer pays lump sum amount immediately to the nominee. Also, the nominee will get fund value at maturity as planned by the deceased parent. This premium waiver benefit is not available in PPF, which stops after the death of an investor and the nominee gets all money. It is an unfortunate situation as funds will be paid too early and used for needs, not the ones planned for.
If you stay invested in a PPF due to its low-risk nature, time has come to go for ULIP child plans which allow switching monies amongst different fund options to protect it from market downturns. If time is on your side, invest in equity funds to get maximum benefits from markets. Similarly, when you reach near to the maturity date of the policy, you should switch funds from equity to debt to protect your money from market volatility. By staying invested for a long term, you can earn maximum returns, loyalty benefits, and wealth boosters.
Child ULIP Plan Vs PPF
|Tenure||Child ULIP Insurance Plans||PPF|
|10-20 years||15 years|
|Expected Rate of Return||10 – 15%||Flat 8.1%|
|Premature Withdrawal||After completion of five policy years||After completion of the seventh year|
|Tax Benefits||Both premium and maturity benefits are tax-free under Sections 10 (10D) and 80C of the Income Tax Act, 1961.||Given under Section 80C of the Income Tax Act. Also, interest earned is tax-free.|
|Maximum Contribution Limit||In case of salary bonus or windfall gains, you can invest the surplus amount in equities to reap more benefits.||The maximum you can contribute is Rs 1.5 lakhs/year per account.|
As it is said, “Prepare your child for the road, not the road for your child,” while, PPF offers assured benefits, it may fail to compete with rising inflation rate. A good mix of both the investment— PPF and ULIPs can help you to achieve your goals.