Why should you choose the right Mutual Funds for your child’s education?

Considering the demand and value of information and knowledge, education in India has become more expensive than ever. As per the data released by the National Sample Survey Office, the average annual expenditure on the private schooling of a child has increased by a whopping 175% in the last 10 years. During the same period, the cost of professional or technical education increased by 96%. 

Considering the expenses that your future may hold, it is clear that now is the best time that you start saving for your child’s education. To begin, you must develop a financial strategy depending upon your needs, implement it with a sound investment portfolio and maintain it for as long as you can. With little research and effort, you can become your own financial planner and in almost no time will you land up with sufficient corpus for your child’s education. 

Estimating the Expenses

Let’s consider the rapid increase in the cost of higher education in India depending upon the current scenario. A 2-year post-graduate program at IIM Calcutta cost around 4.3 lakh in the year 2007. The same amount rose to 16.6 lakh in 2013 and 23 lakh in 2020. The education expense for such a course in a prestigious college would ask for a fortune in the years to come. Even if this amount increases by 10% every year, you will have to pay an amount approximately equal to Rs.60 Lakh in another 10 years for your child’s education fee at this premier business school.

To be clear, undergraduate courses are not behind either. The tuition fee of all IITs increases by Rs. 2 lakh per year; this amount in the earlier years, was Rs.90,000. And this does not include all the expenses that form part of one’s life at college, whether academic or non-academic.

The above table shows the change in tuition fees of premium education institutes in the last decade (fees amount taken in approximation)

Based on the above calculations, if you have a 1-year-old child now, you would need to create a total corpus of Rs. 42 lakh for paying just the tuition fees of an Engineering degree. The tuition fee is even higher at Rs 46 lakh for funding an MBA education for your child. Hence, you must plan accordingly in order to be able to save regularly and invest effectively to fund your child’s education and safeguard his/her future.

Child Plan or Mutual Funds – Which is the better investment option?

Many investors opt for child plan instead of mutual funds when planning for their children’s education expenses. However, there are a number of reasons that favor mutual fund investments in comparison with child plans while planning for children’s higher education.

• If you are a beginner in financial investment, you must first understand that insurance and investment are two different things. While an insurance policy intends to provide protection in the future, investments help in wealth creation in the long term. While investing for your child’s higher education, you don’t need any security but a sufficient corpus in order to fund his/her education. Hence, putting your funds in a child plan will not benefit you as much as investing in a mutual fund would do. 
• A child plan insures one or both the parents in case of any unforeseen event. On the other hand, mutual fund investments help you grow your capital by delivering high returns in the long run. To develop a balance between both the options, you may invest in such a way that a part of your funds is set aside to provide for a child’s plan while the remaining amount is invested in market link instruments such as equity or debt.
• This way, in case of the unexpected demise of an insured parent, a sizeable sum (sum assured) is paid out in favor of the child, which can be utilized for the child’s education and upbringing. However, the main point to note here is that only a portion of the premium amount is being invested to make your money grow, while the rest is diverted towards maintaining insurance coverage of the parents.

How to Invest in Mutual Funds for Child Education Plan

There is no question over the fact that mutual funds feature various advantages over many other traditional investment options. In case you are new to mutual funds or are busy following a DIY investment strategy, you may also get in touch with an experienced fund manager who can do the job on your behalf.

The following are a few tips to help you get started-

• Remember that making investments should be a regular habit rather than once in a while activity. Starting to invest early and then following up with regularly provides you with the benefit of compounding, among others. Of course, if you have a large sum of money sitting idle, it can easily be put to work according to your investment targets and prevailing market conditions. 
• However, one of the best ways to save for your child’s education is to invest through a Systematic Investment Plan (SIP). A SIP works best for all kinds of professionals – salaried or business. Regularly investing small amounts over the long term leads to the accumulation of a large corpus which can be very useful at a later date.
• Depending upon your income and factoring in your monthly expenses, you should be able to arrive at an amount suitable for investing in SIPs. Since the target corpus tends to be a substantial amount, a SIP should be done for a long-term and not for a short time, as one or three year period. Investing small sums regularly will not burn a hole in your pocket and is bound to help you reach your target corpus in a timely fashion. 
• Moreover, by investing through SIPs, you will not have to time the market since the concept of Rupee Cost Averaging will apply. When you invest through SIP, you invest on a particular day of each month, irrespective of market conditions. In some cases, you might have to purchase units at a higher NAV while in others, the units will be available at a lower NAV – ultimately creating a balance between both. This way, you remain largely unaffected by the volatility of the market. This feature of SIP investments is known as Rupee Cost Averaging. You will also benefit from the power of compounding principle, which is essentially earning returns on not just the capital but also the returns generated. 

Also Read: Best Mutual Fund for Child’s Future

Investing in SIPs

Let’s consider that you want to invest Rs. 5,000 per month and that your child is aged about 5 years at present. If we consider an average return of 12% on your investment, by the time your child goes to college, which would be around 13 years down the line, your total corpus would be worth Rs.18.61 lakh (approx). The rate of return, however, does depend on the type of fund invested in. Moreover, even if the investment is done in the most conservative way, equity mutual fund returns over the long term have been observed to range between 10% and 12%.

On top of this, if you are able to increase the total annual SIP amount, a larger fund can be accumulated. In the above scenario, if the amount of investment per month is increased by 20% annually, your total accumulated corpus should be worth over Rs. 1 Crore by the time the child is ready for college. This is known as the concept of compounding. Considering that, on average, your income will continue to increase, investing more through SIP should be a definite possibility.

Which Mutual Funds to Choose for Your Child Education Plan?

Deciding to invest in mutual funds is only the first step. Selecting which fund to invest in is a bigger choice to make. Hence, you must undertake research about how to invest in mutual funds, which funds have delivered remarkable historical returns over the long term, how much risk you can afford and what investment horizon is. 

The choice must be made depending upon your specific requirements of generating adequate corpus in the long term to fund your child’s education. You must carefully keep a check on the following before you make your decision-

• To begin with, instead of investing in just a single fund, diversify your investments across at least two or three different funds
• On average, a SIP of a minimum of Rs.2,000 in each fund is a good place to start, which will ensure that your investment portfolio benefits from the expertise of different fund managers and various types of funds
• Your investment portfolio should ideally be predominated by relatively lower risk diversified equity funds with smaller investments made into various small and mid-cap funds. Diversified equity funds provide key benefits such as lower volatility in the long term
• Small- and mid-cap funds tend to feature a higher level of volatility,  however, the potential rewards on offer are a lot higher than most other equity investments
• If you are extremely risk-averse, choosing a few good hybrid funds might be a suitable alternative. However, by investing in hybrid funds, your returns will tend to be lower than equity investments. This is mainly because 30 to 40% of a hybrid fund’s investments are made into potentially low return debt instruments
• Additionally, it must be noted that the returns of all equity funds and equity-oriented hybrid funds will be tax-free if redeemed after 1 year of investment
• Along with this, you should also look at the time period that you have to stay invested in a fund in order to create your target corpus. If you have more than 10 years in hand before you need the money, go all out and invest in equity funds that have the highest growth potential. However, if you have between 5 and 10 years in hand, it might be more suitable to opt for a balance between equity and hybrid funds
• Potentially lowest risk debt funds, on the other hand, are only suitable in case you are highly risk averse or need the payout immediately, which isn’t the case here

Invest early to Enjoy Big Benefits 

When it comes to investing in mutual funds, starting early is the key to ensuring that your finances are less burdened. For instance, if you start saving for your child’s college education (required at approximately 18 years of age) when the child reaches 5 years of age, you will have to invest only Rs. 6,700 per month to reach a goal of Rs. 25 lakh. Further, if you start saving after the child reaches 11 years of age, the invested amount per month will go up to Rs. 19,000 (assuming equity return of 12% p.a. in both cases). 

As in every case, understanding how mutual fund investment is useful for beginners can serve as the first step to developing an investment plan that is ideally suited to your specific needs.

Suggested Read: Top Mutual Fund Schemes for Child’s education

To sum up, here are a few key points to keep in mind while planning to save for your child’s education-

• The cost of education is going up day by day. Hence, it is extremely important to start saving as soon as possible in order to lessen your financial burden at a later date
• Never mix insurance and investment. Child plans are insurance policies. Their returns can never match up to that of mutual funds
• For insurance needs, a term plan is a cheaper alternative than a child plan coverage
• One of the best ways to accumulate a corpus for a child’s education over the long term is by investing through SIPs in mutual funds
• The investment strategy in mutual funds is a combination of the time that you have to build the corpus, your risk appetite, your income level, and the target corpus
• Investing regularly through SIP helps beat market volatility and also build a sense of investment discipline