If you are banking on Kaun Banega Crorepati, to make a crore of rupees for your child, forget it!
If you are hoping to win a lottery, to make a crore of rupees for your child, forget it!
Only one, among millions of parents, may turn out to be lucky.
Whereas, wouldn’t it be great if many more of us were able to gift Rs.1 crore to our kids on their 21st birthday?
Listed below are the five ways to realize this dream (assuming the child is of age 6 years now).
Indians love to invest in property. So I am sure that many people would readily jump at this option to make their child a crorepati.
At a reasonable rate of 10% appreciation, a property valued at around Rs.25 lakhs today would be worth slightly more than a crore in 15 years time.
To buy a property worth Rs.25 lakhs, you need to pay
- Rs.5 lakhs upfront as down-payment and
- Rs.21,500 per month as EMI (home loan – Rs.20 lakhs, tenure – 15 years, interest rate – 10%)
Fifteen years later, the loan would be fully repaid and your property would be valued at around Rs.1 crore. On the 21st birthday, you can gift this property to your child.
As an icing on the cake, this is a zero-tax transaction, as a transfer by way of gift to your children is exempt from tax.
Another much-loved investment option for the Indians is gold; especially for women who start building up a cache of gold jewellery for their daughter’s marriage, right from birth.
If this is your preferred route, to see your kid as a crorepati, you will have to buy almost Rs.31,000 worth of gold every month for 15 years — assuming average 7% p.a. price appreciation in gold.
Just one word of advice: There is a risk of theft with so much jewellery and it also involves “unnecessary” making-charges. So, instead of jewellery, you should buy paper/electronic gold i.e. either Sovereign Gold Bonds or Gold Exchange Traded Fund (Gold ETF).
On her 21st birthday, you can gift this gold holding to your daughter.
Again a zero-tax transaction, as a transfer by way of gift to your children is exempt from tax.
Through Fixed Deposits
Yet another preferred mode of investment for Indians! Indians simply adore FDs.
Under this category, there are many options such as Bank Fixed Deposit, Recurring Deposit, Tax-Free Bonds, PPF, Debentures, NSC, etc. wherein you earn a fixed rate of interest.
Under most of these options (except a few such as PPF, Tax-Free Bonds or Sukanya Samriddhi Scheme) the interest income is taxable. Worst, even if you don’t withdraw your deposit, the interest accrued during the year is liable for income tax.
Accordingly, depending on whether you have to pay tax or not, your monthly investment amount will vary.
Assuming 7.5% p.a. average rate of interest…
… At zero tax, you will have to invest about Rs.30,000 per month for 15 years.
… At 30% tax, you will have to invest about Rs.36,000 per month for 15 years.
Thus, you can have a gift cheque of Rs.1 crore ready on your child’s 21st birthday.
As mentioned, this may involve paying tax on the interest income.
One more of the dependable options for the Indians!
If you choose a traditional insurance plan such as an endowment policy, your payout would work out to around Rs.32,400 as the monthly insurance premium for a policy tenure of Rs.15 years, assuming 6.5% p.a. returns from the policy.
This will give you Rs.1 crore at maturity, by which time your child would be 21.
One more of the tax-free options, as returns from an insurance policy, are exempt from tax.
Through Balanced Mutual Funds
This is MY favourite option.
The time frame is 15 years. Therefore, it makes ‘investment’ sense to skip the above options (especially Gold, FDs, and Insurance) and give a chance to equity.
However, 100% equity would be rather unpalatable for the risk-averse Indians. So I suggest the Balanced Mutual Funds. These have around 65-75% exposure to equity and balance around 25-35% to fixed-income.
Going by the historical trends — and 10% Long Term Capital Tax — on a conservative basis one can easily expect a post-tax return of around 10.50% from Balanced Funds.
Accordingly, you will have to invest Rs.22,800 p.m. for 15 years as SIP in Balanced Mutual Funds to build Rs.1 crore for your child.
The best thing about this Mutual Fund route is that the amount to be invested is the minimum among all the options.
This is an important aspect to consider, especially when you have two kids and you want to gift Rs.1 crore to both of them. With all other options viz. Property, Fixed Deposit, Insurance and Gold, the savings required would be really high (and not affordable for many).
So, what are you waiting for?
Take your pick and make a move!