Why Invest In Mutual Funds for Your Child’s Education?
Today, a course in engineering costs somewhere around 6 lakhs! But by 2033, the costs will rise and easily touch the 12 lakhs mark. Today a degree in medicine costs around 12 lakhs and in 2033, it may be expected to go up to around 67 lakhs.
Without a doubt, the gravest concern of parents today is linked to their children’s education and the ever rising education costs. Hence, unless and until you can expect significantly high returns from your investment, you cannot consider yourself sufficiently prepared to shoulder this big responsibility. So, the only wise move seems to be a switch from debt to equities.
What most parents do is choosing child plans that offer a fixed income, and small savings schemes that operate on a long term basis such as fixed deposits and PPFs. Sadly, all such options offer low tax returns, somewhere around 6-7%. They make sure that your education kitty remains safe but not swollen.
If you look at things from a risk-reward perspective, you will see that over the long term, a term of 15-20 years, which is generally the term for education investment, equities happen to the best investment avenue.
Equities are also amazing from an economic perspective. So, they make investment for child easy.
But because, a lot of people don’t like to invest directly in equities, they should opt for mutual funds to reap all the benefits that equities can offer. The reasons why equities are the best investment option are as follows -
- Fund managers that make mutual fund investments on behalf of you allocate funds after much research, analysis and discussion.
- There is no concentration risk, because portfolios in mutual funds remain well diversified.
- You get the kind of flexibility required in an education fund.
- Short term mutual funds are a little risky. Since education funds are mostly long term, your fund is not subject to market volatility.
- 10-12% is the minimum you get when you invest in an equity oriented mutual fund. The percentage may differ across child investment plans.
One of the biggest advantages of choosing a mutual fund for your child’s higher education is that, you can transfer your money from a high risk, high return fund to a low risk, low return fund when finally the point of time arrives when you need to redeem the money. This is an absolutely no loss affair because at the end of the term, it’s risk that you need to minimize; lower returns towards the end won’t hamper the overall growth of the fund.
The good news is that, switching the investment is not a big deal, as this can be done with the mere click of a button. A minimal annual asset management fee will indeed be charged, but that is too negligible as compared to the benefits you get investing in a mutual fund.
Here are the steps that you need to follow for setting up and maintaining mutual fund for your child’s education -
- First, you need to open a minor folio.
- Go for the SIP option and choose an amount that you think won’t hamper your life or day-to-day expenses. Make sure it’s as high as possible.
- These SIP amounts should be reviewed every year and increased if needed.
- On the basis of the investment horizon, determine your asset allocation.
- Asset allocation and investment performance should be periodically reviewed. Once a year is advisable.
- A couple of months before payout, the required amount of funds should be moved into a liquid fund.
Here are a few questions that you need to ask yourself before investing -
How much should I save a month?
This depends on the age of your child and the amount of time you have at hand before your child starts going to college or when it’s time to use the funds. So, obviously if you need the funds after ten years, you will have to save more than if you needed it after 15 years.
What should be my investment aim?
This depends on the kind of education you are thinking of providing your child. Fixing an amount in mind, before starting to invest is extremely important. You can fix this amount by doing some research and finding out what would be the cost of education in India by the time your child grows up. Although there are many investment plans, choosing the best investment plan for child is highly advisable.
Mr. Ajay Kumar Jain, M.Sc, Chief Managing Director
Being the Chairman cum Chief Managing Director, he focuses on holistic investment planning and wealth management and tries to make investment planning simpler for retail and HNI investors. Investor education is one of the prime things that Mr. Ajay Jain focuses on as he believes financial education is the foundation of successful investing. With over two decades of experience, Mr. Jain has made a mark in the Indian mutual fund industry due to his compassion and sheer hard work.