SIPs or child insurance: What’s best for building an education corpus?

I want to build a corpus of ₹20 lakh in about 12 years for my child’s higher education. I’ve been considering child insurance plans as they offer tax benefits and waive premiums if something happens to me. However, my wife believes they are expensive and suggests investing via SIPs in mutual funds. How should I decide?

—Name withheld on request

Planning early for your child’s education is a wise move. It gives you the advantage of compounding and helps manage risk better over time. First, let’s address your concern about financial protection. Rather than relying on bundled insurance in child plans—which often come at a high cost—it’s more effective to buy a separate term insurance plan. 

Choose the cover using the need-based method, factoring in living expenses and unavoidable goals like education. With adequate term cover in place, you’ll have the freedom to explore more efficient investment options.

Your wife’s suggestion of using systematic investment plans (SIPs) in mutual funds is both practical and cost-effective. Here’s a suggested approach:

Invest in aggressive equity mutual funds for the first 10 years. Assuming an average return of 12% per year, a monthly SIP of ₹7,700 can grow to around ₹17.8 lakh by the end of year 10.

In the final two years, gradually shift the funds to lower-risk options like fixed income, arbitrage, or conservative hybrid funds. Assuming a 6% annual return during this phase, your corpus could reach ₹20 lakh by year 12.

Make sure you’ve accounted for inflation while arriving at the ₹20 lakh target. If not, revisit the number—education costs rise faster than general inflation. To be safer, consider increasing your SIP by ₹1,000– ₹2,000 to cushion against any shortfall due to lower-than-expected returns or changing costs.

Tax planning is another essential aspect.

Consider investing in your child’s name. If your child turns 18 by the time they start higher education, they’ll be treated as a separate taxpayer. This means:

1. Eligibility for basic tax exemption, which may be higher in the future.

2. Capital gains exemption of ₹1.25 lakh annually for equities.

3. For fixed income instruments, returns are taxed as per slab rates. If your child has no other income, they could pay little to no tax on redemptions up to ₹12 lakh, under current tax rules.

Rather than going for a bundled child plan, a combination of term insurance and SIPs offers better returns, lower costs, and more flexibility. It allows you to plan efficiently while protecting your family’s financial goals.

Starting early and staying disciplined is half the job done—and you’ve already taken that crucial first step.

Rakshith H.D., head sigital sales, Goalteller