A mutual fund is an investment option that helps you create a corpus for your child's education. Let's understand how mutual funds can do a fantastic job when you plan your child's future.
The rising cost of education has become a cause of concern for many parents. Today, the cost of primary education for a child can be in the range of Rs. 60,000 to Rs. 3 lakhs annually. In such a scenario, the expenses incurred for higher education can go beyond our imagination. Considering the increasing cost of education, as a parent, you need to invest money into financial instruments which will give you expected returns.
Mutual funds is one such investment option that would help you create a corpus for your child’s education. However, many investors choose a child plan instead of mutual funds when planning for their child’s education. There are a few reasons why child plan may not work well when it comes to giving expected returns. For starters, it is advisable not to mix insurance and investment. The primary purpose of an insurance plan is to provide coverage rather than making your funds grow. In the case of a child plan, one or both parents are insured. Therefore, a significant part of the fund is set aside to provide coverage for insurance and the rest is invested in market-linked securities. On the other hand, mutual funds offer a better way of investing and making your investment grow over a period of time.
How to invest in mutual funds for child education?
It is important to note that investing money in mutual funds should be a regular habit. Regular investment and early savings will provide you with the benefit of compounding. Depending upon your monthly income and expenses, you should be able to arrive at an amount that is suitable for investing in mutual funds through the SIP investment option.
Since your targeted corpus is likely to be a substantial amount, your SIP investment has to be done for relatively a longer-term. Investing a small sum regularly will not burn a hole in your pocket, and you can reach your investment target on time.
Now let's consider an example of how investing in mutual fund SIP can benefit you as a parent. Let us assume that you want to invest Rs. 5000 per month towards your child's education. Your child's present age is 7 years, and by the time your child opts for higher education, say after 11 years, your total corpus would be worth around Rs. 16 lakhs, considering 14% return rate. The rate of return, however, depends on the types of mutual funds that you choose to invest your money in and prevailing market conditions. However, even if the investment is made in the most conservative way, equity mutual fund will give you returns over the long run in the range between 10% to 12%. Obviously, if you can manage to increase the SIP amount, you will be able to accumulate larger funds.
Which mutual fund to select for your education plan?
Choosing an ideal mutual fund scheme based on your specific requirement is important to generate adequate fund for your child’s education. To start with, instead of investing in a single fund, you should consider diversifying your mutual fund investment across at least two to three different funds. This will ensure that your portfolio benefits from the expertise of different fund managers and different types of mutual funds. After all, when it comes to investment, the importance of diversification should not be ignored!
There are basically seven types of mutual funds:
- Money market funds
- Fixed income funds
- Equity funds
- Balanced funds
- Index funds
- Speciality funds
- Fund of funds
Your portfolio should include relatively lower risk diversified equity mutual funds with smaller investments made into small and mid-cap funds. Diversified equity mutual fund provides a key benefit of less volatility in the long run. Small and mid-cap funds are exposed to higher volatility of the market; however, the potential returns are also a lot higher than most other equity instruments. You also need to consider the time frame you have to stay invested for, so as to achieve your targeted corpus. If you have about 10 years in hand before you need money, you can invest in equity mutual funds, which has the highest growth potential. However, if you have five to seven years in hand, it is wise to invest in balanced funds. The lowest risk debt funds, on the other hand, are suitable if you are highly risk-averse and need pay out in a shorter period of time.
While creating an investment portfolio for your child’s education, you should follow these guidelines
- Open a minor account
- Use a Systematic Investment Plan as an investment route.
- If the college enrollment of your child is less than five years away, make sure your investment portfolio consists of both equity and debt.
- If the higher education of your child is more than five years away, an aggressive portfolio consisting of balanced funds will be ideal. A balanced fund will help you to get the flavour of fixed income.
- Review your investment portfolio every year. There is no need to press the panic button if any of the funds have been under performing for a year.
- Two years before the higher education, the entire surplus accumulated in the equity funds and balanced funds should be shifted into debt funds.
- It is advisable to increase the amount invested in SIP, every year. Saving for your child's education can cause stress, but with proper planning, it doesn't have to be as stressful. Whether your child wants to go to medical school or pursue studying arts, mutual funds can be your financial stress buster. A great way to start with is a mutual fund SIP that allows you to save and invest a certain amount of money regularly. A mutual fund is the best way to stay invested for a long period to create wealth for your child's education.
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