How to use Mutual Funds to plan for your Child’s Education?

How to use Mutual Funds to plan for your Child's Education?

With each passing year, education in India is becoming more and more expensive. The cost of getting admission in a decent college has touched the sky. The report by National Sample Survey Office (NSSO) has stated that the average annual private expenditure for general education has shot up by a staggering 175% in the last ten years.

For instance, the fees for the class of 2018 in IIM-Ahmedabad will be around Rs 19.5 lakh for the two-year course. This figure is 400% higher than what the Management schools charged in 2007. If this trend persists, the cost will rise roughly Rs 95 lakh by 2025.

Looking at the above-rising costs of education, it is prudent that parents have a sizeable amount of savings for their child’s education. In this scenario, implementing a sound financial strategy with a robust investment portfolio will be the key.

Investing in the mutual fund portfolio can help cover all the educational expenses, and reduce the burden on your monthly budget. Here is how you can use mutual funds as your child education plan:

Early Bird Catches Many Worms

Mutual funds feature various advantages over many traditional investment options. Regular investment with an early start can provide you with the benefits of compounding.

For instance, if you start investing in mutual funds when your child is five years old, a monthly investment of Rs 6,700 can yield up to Rs 25 lakhs when your child is of college-going age (18 years).

But if you start investing when your child is 11 years old, the monthly investment can go up to Rs 19,000to yield the same corpus of Rs 25 lakhs.

Parameters Age Monthly Investments Required Corpus At 18 Years
Situation 1 5 Years Rs 6,700 25 Lakhs
Situation 2 11 Years Rs 19,000 25 Lakhs

Use SIP schemes

You can go for, Systematic Investment Plan (SIP), which is the most preferred method of investing in mutual funds. With SIP investment, you can fix the amount you are comfortable in investing. Your investment goals can be easily aligned with your SIP investments as the SIP method requires you to invest a certain amount regularly and helps to ride out the market fluctuations.

This method also benefits from the rupee cost averaging by getting more units when the market price is low and buying fewer units when the market is high. Let’s see how investing in SIP plans benefits:

Let’s say, you decide to invest Rs 5000 per month when your child is five years old. Considering the average returns to be in the range of 10%-12%, after 13 years, your total corpus would be worth around Rs.18.61 lakhs.

If you increase your investments in the above SIP, a higher corpus can be accumulated. For example, if the amount of investment is increased by 20% annually, your total accumulated corpus should be worth over Rs 1 crores by the time the child is ready for college.

Choosing the right mutual fund as your child education plan

To generate adequate long-term savings for your child’s education, you must select the ideal mutual fund based on your requirements. You can also invest in two or three different funds to reap the benefits of diversification. Ideally, an average a Rs.2000 SIP in each fund is a good amount to start with.

The main idea for investing in mutual funds as your child education plan should be building an investment portfolio which has relatively lower risk diversified equity funds.

If you are extremely risk-averse, choosing a few hybrid funds might be a good alternative. However, your returns will be lower as compared to the equity investments.

Also, look at the time frame you want to stay invested to reap the essential benefits. If you have more than ten years, investing in equity funds can reap you the highest growth potential. However, if you have a lesser time frame, between 5 and 10 years, opt for a balance between equity and hybrid funds.

Conclusion

To sum up, let us list the key points to keep in mind when planning to use mutual funds as your child education plan:

  • Start saving early as it will lessen your financial burden at a later stage.
  • You can accumulate a considerable corpus for child’s education over the long term by investing through SIPs in mutual funds.
  • Build your investment strategy based on the time you have to build the corpus, your target corpus, your risk appetite, and your income level.
  • Don’t ignore your risk profile.
  • Don’t pick schemes based only on one-year performance.
  • Invest regularly to beat market volatility and build an investment discipline.