Ensuring Your Child’s Education with Fixed Deposits

Fixed Deposits (FDs) for children can be an integral part of your financial strategy.

Education is one of the most significant investments you can make in your child’s future. With the rising costs of higher education, planning and saving early is crucial. Fixed Deposits (FDs) for children can be an integral part of your financial strategy. This safe and stable instrument can be just what you need to set up an education fund for your child. Let’s understand how FDs can be utilised effectively to ensure your child’s education.

Why Should You Opt for an FD to Meet Your Child’s Educational Costs

Here are some reasons why choosing an FD may be a better choice for funding your child’s education:

1. Safety and Security: FDs are known for their low risk. Issuers offering FDs are generally regulated by the RBI. This ensures the safety of your funds. It makes FDs an ideal choice for conservative investors who prefer stability. FDs give you peace of mind knowing that your child’s education fund is safe and growing gradually.
2. Guaranteed Returns: The interest rate on FDs is fixed at the time of investment. This guarantees that the returns will not be affected by market volatility. This provides a predictable growth path for your savings.
3. Flexible Tenor Options: You can invest your money over a tenor of your choice. These usually range from a few months to several years. Choose a tenor that aligns with the timeline for their child’s educational milestones.
4. Tax Benefits: Under Section 80C of the Income Tax Act, 1961, certain FDs qualify for tax deductions. You can save up to ₹1.5 Lakhs per annum by opting for a 5-year tax-saving FD. This can help reduce your overall tax liability while saving for education.

Strategic Planning with Fixed Deposits

To maximise the benefits of FDs for your child’s education, planning is essential. Here are some steps to follow:

1. Estimate Future Education Costs: Start by calculating the total educational cost. This includes tuition fees, accommodation, books, and other expenses. Consider the rate of inflation in education costs. As per a recent survey conducted by Bankbazaar, this inflation rate went up to 12% in India.
2. Determine the Required Savings: Based on the estimates, calculate the amount you need to save. Try to assess the amount you need to deposit, the ideal tenure, and the interest rates offered to you. Learn about the amount you need to deposit to comfortably fund your child’s education.
3. Choose the Right Option: Use the FD calculators available on the issuers’ websites. These online tools can help you determine the maturity amount quite easily. Compare FDs offered by various issuers by adjusting the interest rates and tenors. Look for institutions that offer higher interest rates and favourable terms. Ensure the chosen option aligns with your saving goals and tenor.
4. Stagger Your Investments: Avoid investing a lump sum amount at once. Instead, consider staggering your investments in multiple FDs with different maturity dates. This ensures liquidity. It further enables you to reinvest the proceeds at potentially higher interest rates.

Monitoring and Adjusting Your Plan

Regularly monitor your FD investments to ensure they are on track to meet your savings goals. Keep an eye on the interest rates and inflation rates, and be ready to adjust your strategy if necessary. For instance, if the inflation rate rises, you might need to increase your savings amount. On the other hand, you can also consider investing in FDs with higher interest rates.

One of the advantages of FDs is the ability to reinvest the maturity amount. It enables you to benefit from the power of compounding. It can significantly boost your savings over time. This is a crucial consideration when planning to invest in an FD. If timed correctly, you can earn high amounts by reinvesting in FDs.

Using FDs as Collateral for Education Loans

In case of a shortfall in your education fund, FDs can also be used as collateral for education loans. Many issuers offer loans against FDs at favourable interest rates. Since the loan is backed by the FD, the risk to the lender is minimal, allowing them to offer more favourable terms. This can be quite beneficial if there is a shortfall in your education fund. It can also be useful if you wish to retain your savings while securing more funds.

When you use an FD as collateral, the deposit continues to earn interest as per the original terms. This means that while you are repaying the loan, your FD remains intact and continues to grow.

Example

Consider you have an FD worth ₹10 Lakhs with an issuer offering an interest rate of 6.5% p.a. Now, let’s say you need additional funds of ₹5 Lakhs to cover your child’s higher education costs. Instead of breaking the FD, you opt for a loan against the FD. Assume that you got a loan of ₹5 Lakhs at an interest rate of 7% p.a. The interest rate is lower than the interest rate usually offered for unsecured education loans.

Meanwhile, the FD continues to earn 6.5% p.a., generating interest while the loan is repaid at 7% p.a. The net cost of borrowing is thus effectively reduced. This makes loans against FD a cost-efficient way to secure funds without breaking your FD.

A fixed deposit for children is a reliable way to save for your child’s education. These come with guaranteed returns, tax benefits, and flexibility in tenors. With an FD, accumulate the necessary funds to support your child’s educational aspirations.