Smart investing for grandchildren: Plan for their higher education without financial stress

Rajath Debnath, a 65-year-old former civil servant based in Kolkata, began investing small amounts in a systematic investment plan (SIP) for his granddaughter, Anaya, when she was born. Mindful of rising costs of education, especially overseas and concerned about inflation and currency appreciation, he decided on an investment option that had the potential to grow over time.

Anaya is now 15, and Debnath is confident of a substantial corpus when she turns 18 and is ready for college. The money will enable her to pursue her academic goals without financial worries.

Many grandparents want to set something aside for their grandchildren but most products don’t allow direct accounts in the child’s name. They can gift them money in a savings account in the name of the minor grandchild but parents remain as a guardian for the minor account, until the child turns 18 and can take over the account. These accounts offer low interest rates but are suitable for short-term goals or small sums. For a medium to long horizon, grandparent can open a fixed deposit (FD) in the grandchild’s name, but parents remain as guardian.

“FDs are low-risk and offer fixed returns. Interest is taxable in the hands of the child; however, clubbing rules may apply if the child is a minor,” said Madhupam Krishna, Securities and Exchange Board of India (Sebi) registered investment adviser (RIA) and chief planner, WealthWisher Financial Planner and Advisors.

For the granddaughter under the age of 10, the Sukanya Samriddhi Scheme, a government-backed plan, offers one of the highest interest rates among small savings schemes and significant tax benefits (EEE: exempt on contribution, interest, and maturity). Only parents or legal guardians can open the account but grandparents can provide funds through parents.

A public provident fund (PPF) account is another option. It can be opened in the name of a granddaughter or a grandson and will be managed by a guardian (parents) until the grandchild turns 18. “This long-term savings scheme (15 years) offers tax-free interest and maturity proceeds, making it suited for building a sizable corpus. Grandparents can contribute up to Rs 1.5 lakh per financial year,” Krishna said.

Mutual funds vs traditional assets 

Government schemes such as the Sukanya Samriddhi Yojana are designed for people who may lack the discipline or knowledge to invest on their own. “The regular, forced savings structure helps them build wealth for specific goals, like a daughter’s education or marriage. However, for those who are disciplined and knowledgeable about investments, mutual funds are considered a superior option due to their potential for higher returns,” said B Srinivasan, director and founder, Shree Sidvin Investment Advisors.

Mutual funds allow compounding over long periods, tax efficiency and flexibility through SIPs. Equity funds are taxed only on redemption, while debt funds (post-April 2023) are taxed at slab rates on redemption.

“By contrast, post office deposits and FDs generate taxable interest annually, even if not withdrawn. They are safe but usually deliver lower returns compared with equity-oriented funds for long-term goals,” said Saurabh Bansal, Founder, Finatwork Investment Advisor, a SEBI RIA.

A modern approach to traditional gift-giving at naming ceremonies (namkaran) involves grandparents opening a bank account in the grandchild’s name before the ceremony.

They then invest a substantial amount of money into a mutual fund in the child’s name, with a parent as the guardian. “As a gift, the grandparents present the mutual fund statement, ensuring the money is used for long-term goals like higher education or marriage,” Srinivasan said.

The process of investing in mutual funds is tailor-made for a minor. “Investing in mutual fund folios in a minor’s name lets one manage the investment as a guardian (parents) and then transfer full control to the child once he/she turns 18,” said Abhishek Kumar, a SEBI RIA and founder and chief investment advisor of SahajMoney, a financial planning firm.

“Alternatively, they can gift the amount as it’s tax-free to grandchildren but the income from invested amounts again attracts tax in the parents’ hands until the child turns 18, after which income is taxed with the child if above the exemption limit,” Kumar said.

According to Section 64(1A) of the Income-Tax Act, when grandparents invest in a grandchild’s name, the income generated from it is clubbed with the higher-earning parent’s income.

Estate planning

Grandparents can invest in their name and gift their investments to their grandchildren at the right time. They can also have their grandchildren as nominees on their investments and include them in their will as well. It is because it is easier to have the intended beneficiary as the nominee.

For more structured arrangements, a trust can be created to ensure regular income for grandchildren. “This is especially useful in cases of family disputes or when parents are absent. Trusts also allow conditions and protections, though taxation depends on the structure. Proper estate planning ensures funds pass smoothly and as intended,” Bansal said.

A disciplined, long-term approach to investing is vital to funding grandchildren’s education. Mutual funds offer higher growth potential than government schemes, making them a superior option for building a substantial corpus to fund a grandchild’s education.