Educating children has become very expensive. Educating children abroad is a big challenge amid the ever-increasing inflation as it requires a lot of money. To fulfill this dream, most parents take education loans. Many parents then avoid taking loans and take the route of mutual funds. Today 14th November is Children’s Day. On this Children’s Day, you can gift children a better education by starting to invest in mutual funds. To accomplish this long-term goal, one has to invest wisely in mutual funds for higher returns.
Select Do according to the target period
Children’s education is a long-term goal. To accomplish this, there are several options for investing in mutual funds. But, funds should be selected according to risk appetite and target horizon.
Three funds, in which you can invest
Diversified Bluechip Equity Funds :
This can be an ideal investment option for long-term goals. In this, money is invested in shares of leading companies in the sector. The risk is low. You can earn upto 12% annual return on long term investment.
FlexiCap Equity Funds :
Through this, you invest in the best large, mid and small cap companies in your sector. Funds are invested under these funds in terms of market capitalization. 9% and more can be returned annually in the long term.
Balanced Advantage Funds:
These hybrid mutual funds invest in both equity and debt. If you want better returns with less risk then investing in hybrid funds is a better option. In this, you can get 8-12 % return on investment.
Keep these things in mind while choosing
Performance track record: While choosing a fund, look at their performance for at least five years. The long-term track record is better. This helps to ensure potential returns and manipulations during previous market cycles.
Expense Ratio : It is the cost of operating a mutual fund. Funds charge those investors. A fund’s expense ratio affects its net return.
Fund Manager’s Investment Practices: A fund manager is responsible for managing your funds. This plays an important role in their performance. Know your fund manager’s investment style before choosing any scheme. For this, you can also refer to the fund house factsheet.
You can also achieve your goal through SIP.
Every parent tries to give good education to their children. For this they can also invest continuously through Systematic Investment Plan (SIP). Consider increasing your investment as your income increases every year. This will help in achieving the target on time.
Now, there is also another school of thought that believes the children need to take ownership of their own education by opting for an educational loan which they would pay for themselves, make them more responsible.
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Regardless of which side you take, by planning to save and invest regularly, you will at least have the choice on whether to fund or not when it is time for them to go to college. More importantly you can sleep peacefully knowing your child’s future is taken care of.
If you have more than 10 years:
Invest 80-100% in equity mutual funds and the remaining part in debt mutual funds, based on your risk tolerance. You can start an SIP in two to three diversified multi cap equity funds along with one short-term debt fund.
If you have 6-10 years:
Invest 50-80% in equity mutual funds and the rest debt mutual funds. Again, the allocation should be based on your risk tolerance. You can start an SIP in two to three div ..
If you have up to 5 years:
Invest 80-100% in debt mutual funds (remaining in equity) based on your risk tolerance. You can start an SIP in two to three short-term debt funds along with one balanced advantage fund (equity allocation is auto adjusted in this category).As the date of college education nears, the equity allocation should be gradually reduced, based on the above framework.Whether you fund the entire education, or help the children plan on.
Be an early bird
One obvious solution is to start saving early. The individual will not only be able to amass a larger sum, but the money will also gain from the power of compounding. A corpus of Rs 1 crore may seem daunting, but it’s possible to save this amount with an SIP of Rs 9,000 for 18 years in an equity fund that gives a 15 per cent return. “Since the rate of education inflation is so high, you need compounding to work for you over a longer period,” says Vidya Bala, Head of Research at Fundsindia.com. This is why Gurgaon-based finance professional Vishal Singla (see picture) started putting away for his daughter’s education when she was three months old.
A delayed start not only yields a smaller corpus but can also jeopardise other financial goals. If you start investing for your child’s education in your 40s, you are likely to fall short of the required amount. Often, parents dip into their retirement savings to fill the gap, but this can be a risky move. “Just because you have funded your children’s education, there is no guarantee that they will look after you in your old age,” warns Bala. The changing nature of employment also makes it necessary to start early. “People are increasingly dropping out of the workforce in their late 40s and early 50s as younger workers, who are more energetic, possess the latest skills and cost less, are ready to replace them.
Choose the right option
An early start isn’t enough. Parents must also invest right to get optimum resturns. Pune-based chartered accountant Chhaya Jain (see picture) started saving for her children’s higher education even before they were born. However, a chunk of her savings are in traditional life insurance policies that offer very low yields of 5-6 per cent. Yes, the returns are assured and tax-free, but they are nowhere close to what other investment options have given in the past. Equity mutual funds, for instance, have delivered average annualised returns of 16.5 per cent in the past 10 years.
Though they have the potential to give high returns, equity investment is not everybody’s cup of tea. This year’s DSP BlackRock Investor Pulse survey shows that though Indians have a high propensity to save and invest, they still seek safety. Almost 52 per cent of the 1,500 respondents said they wanted guaranteed returns from their investments. However, if you have 15-18 years left before your child starts college, equity funds should be the preferred investment for you.
Over such a long period, the volatility in returns is flattened out. If you have the risk appetite, your allocation to equities can be as high as 75 per cent. “A high level of equity is necessary to counter the high rate of education inflation, says Dhawan. You could invest in diversified equity funds and even buy stocks if you have the time and required skills. The balance 25-30 per cent of the portfolio can be in safer options like the PPF, bank deposits and tax-free bonds. Bank deposits are taxinefficient, and if you are in the 30 per cent tax bracket, go for income funds. Instead of being taxed every year for the interest, you will be taxed only at the time of withdrawal.
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