Investment

Best Mutual Fund for Child Education

Inflation may have reduced to 4+-2% levels from its historical high, but the expense of services such as education, healthcare has been on a rising spree. Thus, you must save enough to ensure you do not face any cash crunch when it comes to fulfilling the educational need of your children.

In this blog, we seek to discuss how mutual fund for child education is helpful to fulfilling the needs of your child’s education.

Read on!

How Mutual Fund helps for Child Education?

A child’s education is one of the most significant and most crucial cash outflows that a family face. If we have to look at the cost of tuition, a four-year engineering course costs anywhere around Rs 5-6 lakhs today. Assume your child (aged 7-8 years now) is likely to join engineering in 10 years from now, the cost may rise to Rs 9-10 Lakhs considering the inflation of 5%.

Child-education-cost-1
Source: Tarrakki Research

Will the fees increase this much? Well, yes, the earlier generation had it very easy when the competition and costs were less. But in today’s time, the competition has been on a rising spree, and everyone is considering to send their child to the best engineering college where the fees are increasing owing to rising demand. Also, lifestyle inflation has impacted the cost of education in India. As your standard of living improves, it directly influences your decision about where you would want your children to study.

While we are considering only engineering courses here, there is a management course lined up after engineering. The two-year management course from an elite B-school is in the range of Rs 20 Lakhs currently, which may increase to 2x by the time your child would enroll in the course.

rising-cost-of-child-education-2
Source: Tarrakki Research

Also Read: Types of Mutual Funds in India

How can you overcome the problem of rising cost of education?

The big question that is worrying parents is, how will you be able to fund your child’s education?

  • Start early

One of the distinct ways to accumulate money for your child’s education is to start soon. An individual may not be able to amass a large sum of money very quickly, and thus he/she should take the benefit of the power of compounding. A corpus of 1 crore may seem very high, but it is not if planned well.

For example, an SIP of Rs 3000 for 20 years should be able to help you accumulate the corpus of Rs 45 Lakhs.

Amout-Invested-vs-return-1
Source: Tarrakki Research

We believe you should not wait for the child to turn to 10 instead should start saving from the time the child is born. This gives you much longer term to save and accumulate the money. For example, if you would have started the same SIP for 10 years instead of 20 years, you would need to save Rs 16500 per month to achieve the same corpus as above.

Amout-Invested-vs-return-2
Source: Tarrakki Research

Remember, a delayed start not only yields a small corpus but also impacts your other financial objective. If you start investing for your child at the age of 40-45, you will likely fall short of the required amount. In such cases, it is often seen that in India, parents end up using their retirement corpus for best mutual fund for child education, which is not a good move but only amplifies the risk.

  • Choose the right option

Starting early isn’t enough. You need to ensure that the money you save when you start early makes you money. Thus, for this, you need to ensure that the funds you select are right, or may we can say the asset allocation is proper.

How to do asset allocation?

Very simple, merge your risk profile of the asset to the risk profile of the fund. If you start saving early in life when the child is born, you have a long-term horizon to save. For this, you may opt for equities and equity-based funds.

  • Play safe over the short-term

If the horizon is short, say less than five years. Ideally, you should opt for a balanced portfolio with a higher allocation to debt-based and debt mutual funds. While investing in debt funds is considered safe, you should not invest in random and conduct the right diligence before selecting.

  • Review portfolio timely

Once you have allocated a corpus to a different asset class, and you have started investing, you must review your portfolio from time to time. Depending on the performance of the various instruments in your portfolio, you may need to re-balance your portfolio from time to time. Re-balancing ensures that your portfolio is a true reflection of your conviction at all times, and you, as an investor, are not getting carried away due to the performance of a few asset classes while ignoring the risk element. Also, reviewing the portfolio at regular intervals gives you comfort on the financial goals. It helps you get comfortable if you are on track to meet your objective. If not, you may look to change the asset allocation or the instruments within the asset class.

Invest in Best Mutual Fund for Child

Investing is never a static process, and if it is capital, it is bound to be volatile. While you may start with a 100% equity portfolio at the time if your childbirth (when you have 20 odd years in hand) but when you are approaching closer to goal, to safeguard the accumulated corpus by way of capital gain, you need to start moving your corpus to a comparatively safer asset class. For example, when you are just five years away from the goal, it is crucial that you started a Systematic Transfer Plan (STP) and take out the money systematically from your equity funds to a safer debt fund. This way, you will be able to safeguard your capital by the time you reach your time (say time to pay college fees). And hence to achieve the goad you need to select best mutual fund for child education to fulfill your and child need.

Remember, you need to act cautiously when the goals you are planning for are crucial and can’t be postponed. This is because the volatility of the market can’t be predicted, and you may end up losing considerable chunk if not planned well.

For example, assume you needed money in December 2016 for your child’s education, and you invested 100% in equities since 2006. You would have garnered a sizable sum in 10 years, but you did not safeguard your capital in 2016, thinking you will gain more. But in November 2016, demonetization happened, and the market corrected considerably. At this time, even you’re starting early and in a disciplined manner would not help. If you had begun shifting money from equity to debt from January 2016, you would be left with money that would have helped you meet your expenses.

To conclude, we can say that mutual fund for child education are a great tool to invest and plan for your financial goals. Given each of the goals are different in nature and importance, you must plan for each purpose separately instead of having one plan for all. Remember, in mutual funds, one size may not fit all. Thus your plans are personalized and customized to your profile and not replicated from your colleagues. To know more about profiling yourself or constructing your portfolio with the right asset mix, feel free to reach out to us at info@tarrakki.com. You may also download our online mutual fund app from iOS and Android. We are based in Ahmedabad, so if you happen to be around, feel free to drop by, and we could catch up for a cup of tea and some savories from Gujarat.

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