Start with a goal (education/wedding), estimate future cost with inflation, and automate monthly investing. Combine a diversified equity index fund SIP for growth with PPF/SSY for stability and tax benefits. Keep proper minor folios, term insurance for parents, and review annually to stay on track.
Why this matters
Higher education costs in India have risen faster than general inflation. A structured, tax-efficient plan—started early—lets compounding do the heavy lifting and preserves your other life goals.
A step-by-step plan (do this in order)
- Define the goal clearly
- What: e.g., 4-year engineering degree, ₹25 lakh today.
- When: child’s age today vs. target year.
- Inflation-adjust the target
Use: Future Cost = Present Cost × (1 + i)^n
(i = education inflation; n = years to goal) - Choose the right mix
- Growth bucket: equity index funds via SIPs
- Safety bucket: PPF / Sukanya Samriddhi (for a girl child)
- Open accounts properly (minor rules apply)
Use a minor mutual fund folio (guardian operated) and, if needed, a minor demat (with restrictions). (AMFI India, Securities and Exchange Board of India) - Automate SIPs and align date with salary credit.
- Insure the parent (pure term plan) so the goal survives life risks.
- Review annually—increase SIPs with income and rebalance.
- Transition at 18—update KYC as the child becomes major. (AMFI India)
How much to save every month?
1) Estimate future cost
If a course costs ₹25,00,000 today, in 15 years at 8% inflation:
Future Cost = 25,00,000 × (1.08)^15 ≈ ₹79,40,000.
2) Convert to a monthly SIP
Use the SIP future value formula (monthly compounding):
FV = SIP × [((1 + r)^n − 1) / r] × (1 + r)
- r = expected monthly return (e.g., 10% p.a. → 0.10/12)
- n = number of months
Rearrange for SIP.
For FV ₹79.4 lakh, r = 0.10/12, n = 180 months, required SIP ≈ ₹20,000–₹22,000/month (illustrative; adjust for your assumptions and risk appetite).
Pro tip: Increase SIPs by 5–10% every year (“SIP step-up”) to keep pace with income and inflation.
Visual: education cost balloons with inflation
Even modest inflation has a big impact over time.
01_education_cost_inflation.jpg
Best investment options for your child (India-specific)
1) Equity Index Funds (SIP) — growth engine
- What to use: Nifty 50 / Nifty Next 50 / Nifty 500 index funds.
- Why: low cost, diversified, tax-efficient for long horizons.
- How: open a minor folio (sole holder = child; guardian = parent/court-appointed). Payments can be from the minor’s, guardian’s, or joint account; redemption goes to the minor’s verified bank account. (Securities and Exchange Board of India, Avantis CDN Production Storage)
2) Public Provident Fund (PPF) — stability + tax shield (EEE)
- Account can be opened on behalf of a minor by a guardian.
- Current rate (Jul–Sep 2025): 7.10% p.a.; ₹500 min, ₹1.5 lakh max per FY (combined per minor + any guardian PPF). Tenor 15 years; partial withdrawal/loan rules apply. (mint, The Times of India)
3) Sukanya Samriddhi Yojana (SSY) — for girl child
- Eligibility: girl < 10 years at account opening; deposit up to ₹1.5 lakh/year; partial withdrawal for education at 18; maturity at 21.
- Current rate (till 30 Sep 2025): 8.2% p.a. (government-notified). (NSI India)
4) Sovereign Gold Bonds (optional diversification)
- Can be purchased on behalf of a minor via guardian; interest taxable, capital gains on redemption tax-free (per current rules). Use sparingly (5–10%) to hedge rupee/gold cycles. (Check tranche availability and rules with your broker/RBI notification before investing.)
Opening in a minor’s name: what you must know
- Mutual funds:
- Minor is sole holder; guardian must be a natural guardian (father/mother) or court-appointed. Relationship proof and minor’s DOB are mandatory. On majority, the child must complete KYC to continue transacting. (AMFI India)
- Payments & redemptions (MFs):
- Subscriptions may come from the minor’s, guardian’s, or joint account; redemptions are credited only to the minor’s verified bank account. (SEBI circular, May 12, 2023). (Securities and Exchange Board of India)
- Demat/trading for minors:
- Demat can be opened (not joint). Intraday and derivatives (F&O) are not permitted; several brokers don’t allow direct secondary-market stock purchases in a minor account (IPOs/rights/transfer permitted). Check your broker’s policy. (CDSL India, Zerodha, mint)
Taxation & ownership: avoid surprises
- Clubbing rule (Sec 64(1A)): A minor’s income is generally clubbed with the higher-income parent. An exemption of ₹1,500 per child per year (up to two children) is available under Sec 10(32). Plan redemptions/SWP accordingly. (Income Tax India, ClearTax)
- 80C benefits: Contributions to PPF/SSY count toward the guardian’s ₹1.5 lakh 80C limit (subject to scheme rules).
- Equity LTCG: If units are held in the minor’s name, LTCG under Sec 112A is assessed in the parent’s hands (post clubbing), so use the family’s aggregate ₹1 lakh exemption efficiently.
A simple age-based allocation guide (rule-of-thumb)
- 0–5 years (15–20 yr horizon): 70–80% Equity Index Funds, 20–30% PPF/SSY
- 6–12 years (8–14 yr horizon): 60–70% Equity, 30–40% PPF/SSY
- 13–17 years (≤5 yr horizon): Glide down to 30–40% Equity, 60–70% PPF/SSY/Arbitrage/Liquid for safety
Rebalance annually or when equity drifts ±5–10% from target.
Smart funding tactics (India-centric)
- Grandparents’ gifts: Gifts from specified relatives are tax-exempt; income thereafter is subject to clubbing rules.
- Use “SIP step-up” + bonuses: Channel annual increments/bonuses to top up the goal.
- Windfall discipline: If ESOPs/RSUs vest, allocate a fixed slice (e.g., 25%) to the child’s goal before lifestyle creep.
Common mistakes to avoid
- Starting late and expecting PPF alone to meet an equity-sized goal.
- Buying “child plans” with low returns instead of separating term insurance + investments.
- Ignoring minor-folio rules, causing redemption delays at college time. (Securities and Exchange Board of India)
- Not de-risking 2–3 years before the goal.
FAQs
1) PPF or SSY—what should I choose?
If you have a girl child, SSY (8.2%) often yields more than PPF and is goal-locked for her benefit. Otherwise, use PPF (7.1%) alongside equity SIPs. Both are EEE under current rules. (NSI India, mint)
2) Can I invest in mutual funds in my child’s name today and withdraw into my account later?
No. Redemption must go to the minor’s verified bank account as per SEBI’s May 12, 2023 circular. Plan the minor’s bank account/KYC well in advance. (Securities and Exchange Board of India)
3) Can my child trade stocks or F&O?
Minors can hold a demat but brokers restrict trading, especially intraday/F&O; many don’t allow direct stock purchases in a minor account. Use mutual funds/IPOs instead, and transfer holdings after majority. (Zerodha, CDSL India)
4) How do I plan if I may send my child abroad?
Estimate in USD with an FX buffer (say 3–4% p.a. rupee depreciation) and use a higher inflation assumption (8–10%). Maintain an equity core + PPF/SSY cushion; de-risk 24–36 months before fees fall due.
Bottom line
Start early, automate SIPs into diversified index funds, and anchor the plan with PPF/SSY for stability and tax benefits. Follow the minor-folio and KYC rules, keep adequate term cover on the earning parent, and rebalance annually. This disciplined, India-first framework gives your child a real compounding edge.
References:
- SEBI circular on minor investments via guardian and bank-account rules (May 12, 2023). (Securities and Exchange Board of India)
- AMFI guidelines: Minor must be sole holder; guardian eligibility and majority-update process. (AMFI India)
- PPF rate (Jul–Sep 2025) unchanged at 7.1% (MoF/DEA and major outlets). (dea.gov.in, mint, News On Air)
- Sukanya Samriddhi official rate 8.2% valid through 30 Sep 2025 (NSI). (NSI India)
- CDSL minor demat basics; broker restrictions (illustrative). (CDSL India, Zerodha)