Think of your kids' future... and get your investment mix right

Everyone wants the best for their children. Whether it's health, education or career, parents just don't compromise on quality. But this calls for intelligent planning and investment, so that they would have funds at their disposal at the right time and place. It would be prudent to start investing early so that the capital builds up to a substantial amount to fund the child's needs.

This calls for safety and liquidity in your investments and of course, returns. One must balance these features to arrive at a proper investment mix.

How does one go about the process? Here are a few methods. The most traditional form of investment has been bank fixed deposits. These are safe instruments and can be taken for specific period of time from a minimum of 15 days to a maximum of about 10 years. You can open these accounts in the name of your child and appoint yourself as guardian.

When the child becomes a major, he will be able to use the funds. The interest rates, although not very high, are fairly safe. They vary from three per cent up to a maximum of about 5.5 per cent depending on the term selected.

Once you lock into a fixed deposit for a specific term, your deposit will continue to earn the same rate of interest till maturity, irrespective of any changes in interest rates. Interest is usually compounded quarterly and paid along with the principal although you will also have an option of receiving your interest at regular intervals.

An important aspect here is the taxability of interest income. The interest will accrue in the name of your child, but if he is a minor, the income will be clubbed in the hands of the parent with higher income.

There is, however, a deduction upto Rs 1,500 per year for such income clubbed in the hands of any parent. Once the child becomes a major, he/she will be taxed.

As far as liquidity is concerned, these instruments are not considered very liquid as they attract early withdrawal penalties. However, that would not matter, as the intention in any case, is to save for the long term.