Child Education Planning using Mutual Funds

One common inference emerges singularly in all Financial Planning surveys in India – planning for our kids’ education is always going to be a top priority for Indian parents! Although this aspiration hasn’t changed over the years, the way we save for this critical goal has undergone dramatic shifts. Gone are the days when investors looked no further than “Child Education Insurance Plans” to fund their kids’ higher studies. With AMFI’s impactful “Mutual Funds Sahi hai” campaign, has come the awareness that a low cost, potentially high return, and transparent tool exists for Child Education Planning, in the form of Mutual Funds. Here are the three stages of accumulating wealth for your Child’s Higher studies using Mutual Funds.

Stage 1: Accumulation

The accumulation stage must ideally commence as early as possible – smart investors actually start accumulating money via Mutual Fund SIP’s as soon as their children are born! During the accumulation phase, it would be wise to not pay too much attention to your personal risk profile, and instead focus on making affordable monthly investments into mid cap oriented mutual funds that have high volatility. If you can achieve a 14% return over 18 years (not uncommon for many top-performing mid cap oriented mutual funds), even a small saving of Rs. 5,000 per month can yield Rs. 50 Lakhs by the time your child turns 18.

Stage 2: Aggressive Step Ups

When it comes to saving for your Child’s Education using Mutual Funds, its of critical importance to re-evaluate your own financial situation every now and then and step up your monthly outgo accordingly. Since education costs tend to inflate at supernormal rates, a college degree that costs Rs. 50 Lakhs today will most likely cost between Rs. 2.25 Cr – Rs. 2.50 Cr, 18 years hence. But fret not – starting off with Rs. 5000 per month; but stepping this monthly contribution up by just Rs. 3000 per month every year for 18 years, can help you accumulate nearly Rs. 2 Cr for your kid’s higher studies. Such is the magic of the power of compounding, when coupled with regular and disciplined annual step ups.

Stage 3: De-risking & Corpus Deployment

The final stage in planning for your child’s education using Mutual Funds would be to systematically de-risk your portfolio as the goal date approaches. A common mistake that savers make is to continue to have a 100% allocation to equities all the way to the goal date. This can prove to be catastrophic if market cycles turn unfavorable in the year that you need to redeem moneys. Imagine, for a moment, that a 2008-like situation were to arise in the year that you need to redeem funds to pay your child’s tuition fees or college seat booking amount. You may need to take a loan at that stage to circumvent the horrifying prospect of booking a 50% loss on your hard-won savings! Instead, make sure you begin STP’s (Systematic Transfer Plans) from your high-risk equity funds to lower risk debt funds a good 3 years before your goal date. This will help you safeguard your capital as well as your profits, making them easily redeemable when you need to write that hefty check!