Every parent dreams of providing financial security for their child's future. Whether it's for higher education, marriage, or unforeseen emergencies, investing in a reliable savings plan is crucial.
Children's fixed deposit schemes are among the safest and most rewarding investment options. These accounts ensure disciplined savings with guaranteed returns, making them a preferred choice among parents.
This blog will take you through the benefits of fixed deposit schemes for children and why they are a wise investment choice.
What is a Children's Fixed Deposit Scheme?
A children's fixed deposit scheme is a specialised savings plan designed for minors. A parent or legal guardian opens a fixed deposit account for a child, depositing a lump sum amount for a predetermined period. The scheme ensures secure growth with a fixed interest rate, making it a risk-free investment.
Unlike regular savings accounts, these FDs offer higher interest rates and restricted withdrawals, encouraging long-term savings. Many banks offer children's fixed deposit schemes with a tenure starting from 1 year, ensuring stable and predictable returns.
For example, Reena deposits ₹5,00,000 in her child's FD for a tenure of 5 years at an interest rate of 8% per annum; the investment will grow to ₹7,42,974 at maturity, providing a secure and predictable financial boost for her child's future needs.
Why Consider Investing in a Children's FD?
Investing in a children's fixed deposit scheme provides a structured and risk-free way to build a financial cushion for your child. Here's why it is beneficial:
1. Guaranteed Returns
Unlike market-linked investments such as mutual funds, children's fixed deposit schemes provide assured returns without risks. The fixed interest rate ensures that the invested amount grows steadily over time.
2. Compounding Benefits of Fixed Deposit
Interest earned on the FD can be reinvested, leading to higher growth. Kavitha, a parent of a 1-year-old girl, decides to invest ₹1,00,000 in a 10-year cumulative FD at an annual interest rate of 8%, compounded annually.
| Year | Opening Balance (₹) | Interest Earned (₹) | Closing Balance (₹) |
|---|---|---|---|
| 1 | 1,00,000.00 | 8,000.00 | 1,08,000.00 |
| 2 | 1,08,000.00 | 8,640.00 | 1,16,640.00 |
| 3 | 1,16,640.00 | 9,331.20 | 1,25,971.20 |
| 4 | 1,25,971.20 | 10,077.70 | 1,36,048.90 |
| 5 | 1,36,048.90 | 10,883.91 | 1,46,932.81 |
| 6 | 1,46,932.81 | 11,754.62 | 1,58,687.43 |
| 7 | 1,58,687.43 | 12,694.99 | 1,71,382.42 |
| 8 | 1,71,382.42 | 13,710.59 | 1,85,093.01 |
| 9 | 1,85,093.01 | 14,807.44 | 1,99,900.45 |
| 10 | 1,99,900.45 | 15,992.04 | 2,15,892.50 |
Note: The interest earned each year is added to the opening balance of the next year, leading to exponential growth.
After 10 years, Kavitha's investment has grown to approximately ₹2,15,892.50. This means her initial ₹1,00,000 has more than doubled.
3. Encourages Savings Discipline
Since premature withdrawals are restricted, it prevents unnecessary spending and ensures the funds are used for the child's education and other essential expenses.
4. Customisable Tenure
Parents can select a tenure that aligns with their child's financial milestones, such as school admission, college education, or marriage.
Key Benefits of Fixed Deposit Schemes for Children
Children's FDs have numerous advantages that make them a preferred investment option for many parents.
| Benefits of Fixed Deposit | Description |
|---|---|
| Higher Interest Rates | Banks offer competitive interest rates compared to savings accounts. |
| Tax Benefits | Some banks provide tax exemptions under Section 80C of the Income Tax Act. |
| Premature Withdrawal Facility | While restrictions apply, emergency withdrawals are allowed with a penalty. |
| Reinvestment Option | At maturity, funds can be reinvested to continue earning interest. |
| Safe & Secure Investment | Being a bank deposit, it is protected under RBI regulations. |
How to Choose the Right FD Scheme for Your Child?
Selecting the right fixed deposit scheme for your child requires careful evaluation. Here's what parents should consider:
- Interest Rate Comparison: Different banks offer varying interest rates, so comparing options ensures better returns.
- Minimum Deposit Requirement: Some banks have a lower threshold for minimum deposit amount, making them more accessible.
- Tenure Flexibility: Choose a tenure that aligns with your child's future financial goals.
- Premature Withdrawal Policy: Check for penalties on early withdrawals.
- Tax Implications: Understand the tax benefits or liabilities associated with the FD.
Things to Consider Before Investing
Before opening a children's fixed deposit scheme, parents should assess the following:
- Inflation Impact: Ensure the interest rate covers future inflation.
- Nomination Facility: Assign a nominee to avoid legal complications.
- Auto-Renewal Option: Helps in continuous savings without re-investment hassles
- Bank Reputation: Choose a reputed financial institution like PNB Housing with a history of stable returns.
Steps to Open a Children's FD Account
Opening a children's fixed deposit scheme is a simple process:
- Select a Bank – Compare interest rates and benefits.
- Complete KYC Formalities – Submit the child's birth certificate, guardian's ID, and address proof.
- Choose Deposit Amount & Tenure – Decide the amount and duration.
- Fund the Account – Transfer funds via cash, cheque, or online banking.
- Receive FD Receipt – This serves as proof of investment and mentions all details for future reference.
Conclusion
A children's fixed deposit scheme is a reliable investment option that ensures financial security and long-term benefits. With PNB Housing's guaranteed returns, flexible tenures, and safety, it remains a preferred choice for parents. They can effectively secure their child's future by understanding the advantages of fixed deposit and carefully selecting the correct FD.
FAQs
How does a Children's FD differ from a regular FD?
A children's fixed deposit scheme is opened on behalf of a minor by a guardian. It offers higher interest rates and specific withdrawal restrictions. A regular FD, however, is available for all individuals with flexible withdrawal options and varying tenures.
How safe is it to invest in a Children's FD?
Investing in a children's fixed deposit scheme is considered safe due to guaranteed returns and protection from market volatility. These schemes provide a secure way to grow your child's savings over a predetermined period.
Can children withdraw money from the Children's FD before the maturity date?
No, children cannot withdraw money directly. However, the guardian can request a premature withdrawal under special circumstances, subject to bank penalties or lower interest rates.
Are there any tax benefits for investing in a Children's FD?
Yes, deposits made under certain fixed deposit schemes for children qualify for tax deductions under Section 80C. However, the interest earned is taxable under the guardian's income as per applicable tax slabs.
