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.
Planning to use Mutual Funds
To sum up, let us list the key points to keep in mind when planning to use mutual funds as your child education plan:
1. Start saving early as it will lessen your financial burden at a later stage.
2. You can accumulate a considerable corpus for child’s education over the long term by investing through SIPs in mutual funds.
3. Build your investment strategy based on the time you have to build the corpus, your target corpus, your risk appetite, and your income level.
4. Don’t ignore your risk profile.
5. Don’t pick schemes based only on one-year performance.
6. Invest regularly to beat market volatility and build an investment discipline.
Challenges in Funding Education
Funding education isn’t straightforward due to inflation, which can double course fees in a few years. Plus, tuition fees and living expenses often change unexpectedly. Relying solely on loans or last-minute savings can lead to a financial burden. Without a clear plan, you might find it difficult to gather enough funds when your child needs it most. That’s why disciplined and consistent investing is essential.
Benefits of Mutual Funds for Education Goals
They are managed by professionals who pick the best stocks and bonds. With decent historical returns, mutual funds have helped many grow their money steadily. They also give flexibility and liquidity—meaning you can access your invested money when needed. All these factors make mutual funds a smart choice for education planning.
Types of Mutual Funds Suitable for Child’s Education
Equity Mutual Funds
These funds invest mainly in stocks and have good growth potential over the long term. If your child is young and you’re planning for college in 10-15 years, equity funds can help your money grow faster. Some aggressive growth funds aim to maximize returns, but they come with more risk. They’re ideal if you have time on your side.
Debt Mutual Funds
Less risky than equities, debt funds invest in bonds and fixed-income securities. They give steady, predictable returns and are better suited for near-term goals, like funding school fees in the next 2-4 years. Options include liquid funds and short-term bond funds, which are safe options for short horizons.
Hybrid Funds
Combining stocks and bonds, hybrid funds aim for balanced growth with moderate risk. They are perfect if your child is in middle school, and your goal is medium-term, like high school expenses. They adjust the mix based on market conditions, offering a good compromise.
Index and Sector Funds
These track specific market segments or indices, often at lower costs. They provide a way to invest in particular sectors like technology or financials, which can boost diversification. They’re suitable for investors looking for cost-effective options to diversify their portfolio.
Planning and Selecting the Right Mutual Funds
Setting Clear Education Goals
Start by estimating how much your child’s education will cost in today’s terms. Then, consider inflation to find out the future amount needed. Decide whether the goal is funding primary school, secondary school, or college. This clarity helps determine your investment plan and timeline.
Risk Appetite and Asset Allocation
Assess how much risk you’re comfortable with, especially as your child gets older. A common approach is to allocate more towards equities when your child is young, then shift to safer investments as the time approaches. For example, a 10-year-old might have 70% of investments in equities, shifting to 30% by age 18.
Lumpsum vs SIP Investments
Lumpsum investments mean investing all your money at once. They work well when markets are low or if you have a large sum saved. SIPs spread your investments over time, reducing risk. Combining both strategies can be effective—lumpsum for immediate needs and SIPs for continued growth.
Leveraging Tax Benefits
Investments in tax-saving mutual funds, called Equity-Linked Savings Schemes (ELSS), can provide tax deductions under Section 80C. This not only helps grow your money but also reduces your tax liability. Remember, ELSS funds come with lock-in periods but can be used effectively for education savings.
Automating Investments
Set up automatic monthly deductions from your bank account. Automation ensures you stick to your plan without missing payments. Over years, this discipline builds a significant corpus for your child’s education.
Conclusion
Investing early in mutual funds is a smart move to secure your child’s educational future. Choose the right funds based on age, risk appetite, and goals. Stay disciplined, review regularly, and adjust your plan as needed. Starting today can make the future a lot brighter for your child’s dreams. Make that first step now—your child’s education deserves it!
