By The Buyt Desk
One of your dreams may be to provide your child with a world-class education. Foreign universities offer scholarships; nonetheless, you have to pay for medical expenses, rent, and other overhead expenses from your pocket when the child is studying abroad. There is an easy way to pay for these additional expenses in the future. Timely investment of surplus money for the long-term can enable you to educate your child in a foreign university. Now, the question that arises is which financial instrument you should choose for investment.
A fixed deposit (FD) with a bank is a good investment for the aforementioned financial goal, especially for a risk-averse investor. Let us discuss the reasons behind it.
Safety Net
Firstly, the capital parked in an FD is safe and secure. Since it is not market-linked, it is devoid of the risk of capital erosion. There is an insurance cover available from Deposit Insurance and Credit Guarantee Corporation for deposit amount up to Rs.5 Lakhs in banks. This further safeguards money invested in a bank FD. Therefore, investing money in an FD with the goal of a child’s education leads to capital appreciation and provides capital protection. As a result, your goal is achievable with investment in this financial instrument. For additional security of your investment, do not invest the complete sum in a single FD and instead choose FDs from different banks. Supposedly, you wish to invest Rs.5 lakhs then divide the investment among FDs from 3 different banks.
Stable returns
AN FD is a term deposit in which you withdraw money at the end of a predetermined maturity tenure. The interest rate of a bank FD depends on the bank and the maturity tenure. The rate remains the same for the whole tenure of an FD. Your investment in an FD will earn a stable and fixed return every year, which will augment your capital. But how much return will an FD give you? The answer lies with you. Research the interest rates of different bank FDs before you invest. As of January 2021, IDFC bank provides an interest rate of 8.25 per cent for a 10-years FD.
Sometimes, small-scale banks can give a higher interest rate in comparison to well-known banks. A child’s higher education in a foreign university is a long-term goal. If you time the investment accurately, then you can accumulate sufficient funds by the time your child is ready for college. Let’s say that you invest Rs.5 lakhs in an FD from IDFC bank when your child is nine years old. After the maturity tenure of 10 years when your child is 19 years old, you will have Rs.11,04,712 without any loss.
Tax-saving FD
The interest from an FD is taxed as per your income tax slab. The interest income up to Rs.40,000 is exempt from taxation for individuals below 60 years of age. Beyond 60 years of age, the interest income up to Rs.50,000 is exempt from tax. For a long-term financial goal, you should invest money for at least five years. In this regard, you can opt for a tax-saving FD that has a maturity tenure of 5 years. Rs.1.5 lakhs of the capital invested in a tax-saving FD is deducted from your income under section 80C of the Income Tax Act. Though you pay tax on an FD’s interest, you can still enjoy tax benefit by selecting a tax-saving FD.
In conclusion, while evading the risk of market variations, investment in this gives you a fixed and secure return. Timely investment in FDs can fulfil your dream of educating your child abroad. If you are ready to take some risk, you can explore other long-term investment options like short-term debt funds or index funds. Nonetheless, an FD is one of the safest long-term investment instruments.
