Planning Your Child’s Education using Mutual Funds
Providing a top-notch education for their kids is the number one aspirational goal for most Indian parents. Of late, more and more smart savers are realising the utter futility of buying into traditional ‘child plans’ that provide lower returns than even fixed deposits, while locking in their moneys and providing only a sliver of life cover in return. The burgeoning number of Mutual Fund SIP’s within the middle income, middle age bracket community of Indian savers points to the fact that more and more parents are realising that for their Child Education Planning, Mutual Funds Sahi Hai!
If you, like thousands of others, are planning to build a corpus for your beloved child’s higher studies using Mutual Fund Investments, here are a few things you should keep in mind.
Start Early
It’s hard to imagine your new born son as a strapping teenage college-goer, but time goes by quickly. Many people make the error of procrastinating their Child Education Planning goal by a few years, with the mistaken belief that it won’t hurt the end goal too much. But in the long run, compounding can make a huge different to the final value of your child education fund – and if you use the power of compounding wisely, you’ll save yourself a lot of strife later. Say, for instance, you’d like to save Rs. 50 Lakhs for your new born daughter’s college studies within 18 years. If you start in the year she’s born, you’ll need to save Rs. 6,598 per month to achieve this goal (assuming a reasonable return of 12% per annum). Delay your planning by 5 years, and your monthly saving requirement doubles to Rs. 13,433 – and not just that, your out of pocket outgo increases by Rs. 6 Lakhs.
Begin with the End in Mind
Every year, we come across hundreds of otherwise responsible and caring parents who are living in a fool’s paradise when it comes to planning their kids’ education. Having purchased a policy or two, they believe they’ve got their bases covered for their child’s education – only to realise closer to the goal date that they’re falling woefully short. When it comes to Child Education Planning, it’s critical to chart at least a basic roadmap detailing out your aspirations for your child. Having arrived at what you believe is an adequate sum in today’s terms, you now need to factor inflation into the mix to come to the correct figure. For instance, a top-notch management degree costs around Rs 15 Lakhs today. Considering that the long-term inflation trend for management education in India is close to 9%, that would mean a corpus target of around Rs. 55 Lakhs in 15 years’ time.
Go for Mutual Fund SIP’s
When it comes to saving for your Child’s education, it’s far wiser to be a disciplined investor than an opportunistic one. Instead of shovelling away lump sums of money as and when you have funds available to invest, start Mutual Fund SIP’s instead. In the long run, Mutual Fund SIP’s work brilliantly for Child Education Planning. Because this goal is usually a long-range one, you can benefit greatly from the inevitable ups and downs of the stock markets and reap the rewards of Rupee Cost Averaging & Compounding. Just make sure that you don’t get stuck into hybrid funds or low-risk debt funds for your Child Education Planning goal. Irrespective of your attitude to risk, start SIP’s in aggressive funds such as mid cap funds, and keep hem running through all the ups and downs of the markets. Additionally, remember to step up your Mutual Fund SIP’s at least once a year. Even a small step up of 10% per annum can make a difference of 75% to 100% in your final fund value.
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