One of the most important priorities for parents is to ensure that their children have a safe and secure upbringing, with all the resources necessary for their emotional and physical development. As the cost of living continues to rise with inflation, raising children has only gotten more expensive over the years. Parents need to have a well-thought-out financial plan to make sure that they have access to the funds required to spend on their children’s needs in the short term and the long term.

In this article, we’ll take a look at how investing in Fixed Deposits (FDs) today can help secure your child’s future.

What are fixed deposits?

Before we dive into the importance of fixed deposits for your child’s future, let us first understand the fixed deposit meaning. A fixed deposit, also known as an FD, is a financial instrument that is offered by banks and Non-Banking Financial Institutions (NBFCs) that allows individuals to deposit a specific amount of money for a fixed period of time. The tenure can be anywhere between a few days to a few years, and the bank offers a predetermined interest rate on the deposited amount that remains fixed throughout the tenure of the FD.

Why choose fixed deposits to save up for your child’s future?

Here are some reasons why FDs should be your preferred choice to save up and invest for your child’s future:

Safety of funds: One of the primary reasons that FDs are appealing to parents is the fact that the principal amount that you invest in FDs remains immune from any kind of market volatility. The security of the principal amount is paramount since you need to use the funds for your child’s upbringing, so a low-risk investment like a fixed deposit is an ideal choice.

Guaranteed fixed returns: As explained, fixed deposits offer a predetermined amount of interest returns for the tenure you pick. Essentially, you will be receiving a fixed amount of returns on your investment, unlike in the stock market where your returns are not guaranteed and there is risk of capital loss.

Flexible tenures: You can choose to invest in a fixed deposit for a period ranging from a few days to a few years. You can use this flexibility to your advantage by planning for your child’s milestone expenses. For instance, you can open a five-year FD to take care of children’s schooling fees and a 10-year FD to take care of your child’s college expenses. This way you can ladder your FD investments to align with the different life stage needs of your child.

Periodic returns: FDs come with the option of regular interest payouts – monthly, quarterly, annual, or on maturity. You can opt for a regular interest payout and use this income for any recurring costs, such as school fees, extracurricular classes, or any other expenses.

Loan facility: Many banks offer a loan facility against the FD that you create. In case of financial emergencies like medical expenses, you can choose to take out a loan against your fixed deposit instead of breaking your FD. Thus, your long-term savings will remain intact and continue to earn interest while you take care of any financial issues with the loan.

Tax benefits: You can also opt for a five-year tax-saving FD to claim the tax benefits under Section 80C of the Income Tax Act, 1961. By investing in these tax-saving FDs, you can save up for your child’s future while also reducing your tax liabilities.

How to make the most of fixed deposits for your child’s future

Here are some tips that will help you maximise the returns on your fixed deposits:

Start early: Fixed deposits will give you the best returns over longer periods of time due to compounding. The more years that your principal amount has to earn interest, the higher your returns will be. Thus, it is a good idea to invest in a fixed deposit as early as possible.

If you planning to have a child in the near future, consider investing in FDs right now for maximum returns. Small, yet regular investments can help you accumulate a significant amount of money over a time frame of 10-15 years.

Ladder your FDs: Instead of putting all your money into a single fixed deposit account, consider splitting it into various FDs with different tenures like one year, five years, 10 years, etc., to match your child’s milestones. For instance, make a three-year FD to help pay your child’s playgroup fees, a year five-year FD for school fees, and so on. To do this efficiently, you can use a fixed deposit calculator. This online tool will help you estimate how much interest your FD will earn over the tenure and how much money you will have when the FD matures.

Reinvest the interest amount: If you do not need the interest income from your FDs in the short term, consider reinvesting the interest amount to significantly boost your FD returns, especially in the long run. Many banks offer the option to automatically reinvest your FD along with returns upon maturity.

If you are looking to invest in fixed deposits for your child’s future, consider investing in online instant FDs offered by IndusInd Bank. Some of the key highlights of IndusInd Bank’s Online Fixed Deposits include:

● Book your FD online in three simple steps

● Best-in-class interest rates for higher returns on your investment

● Auto-FD renewal facility along with multiple interest payout options

● Tax-saving FD available

Some key considerations

While FDs are an effective low-risk method to save money for your children’s future, here are some important things to consider:

● In some cases, the returns on your fixed deposits may not beat inflation, thus reducing the overall value of your investment. Consider combining FDs along with other investments like mutual funds to increase returns and diversify your portfolio.

● Interest rates offered on FDs can fluctuate over time. For instance, if you get an FD with a 7% interest rate for five years, you may not get the same interest while renewing your fixed deposit.

● The Deposit Insurance and Credit Guarantee Corporation (DICGC) insures up to ₹5 lakh for each account holder in each bank. Hence, make sure to not invest more than this amount in any one bank to protect your capital in the event that the bank undergoes liquidation.

● FDs can lock up your investments for extended periods of time, causing a loss of liquidity. Even if you break an FD prematurely, you will likely receive lower interest payouts as a penalty. However, the auto-sweep feature can mitigate this issue. This feature allows you to link your FDs with your savings account and set a threshold balance. If funds in your savings account fall below that threshold, the system automatically sweeps the needed amount from your FD into your savings account without any penalties. This way, you enjoy the benefits of both high FD returns and the liquidity of a savings account.

To sum up

Fixed deposits are undoubtedly one of the best investment avenues when it comes to saving up funds for your child’s future. Consider setting up multiple fixed deposits that mature as per your child’s age-linked milestones.

However, FDs should not be your sole investment instrument. You should combine FD investments with mutual funds or other higher-return investments to balance out your portfolio in the long run. If you have any doubts, it can be a good idea to consult a financial professional and get a tailored investment plan that suits your needs.

Disclaimer: This article is published in association with IndusInd and not created by TNM Editorial.