How to Take Care of Your Child’s Education with the Help of Mutual Funds

How to Take Care of Your Child’s Education with the Help of Mutual Funds

Feb 15, 2018

All that your parents hoped for when you were a child, was to create a corpus amount that could meet future expenses such as funding your higher education or marriage. The corpus they wanted to build was also to support their post-retirement life.

If you look closely at your own financial goals today, you will realize nothing really has changed over the years. Your long term financial goals are pretty much what your parents’ used to be. If anything has changed at all, it is the choice of investment plans. While your parents were dependent on PPF, EPF, fixed deposits, and physical gold, you may not like to be!

But the bare reality is that a lot of people your age still prefer to follow on their parent’s suit. Here, we tell you how not taking the conventional PPF or EPF route will help you build a better corpus for your child’s future, especially his education.

Are mutual funds a good choice for children’s education?

Yes, why not! The risk element associated with mutual funds only comes into play when the investment is for a shorter term.

While investing in mutual funds, you are exposed to two choices - invest in specialized children’s education funds or build a kind of investment portfolio that would best suit this requirement.

Before you create a portfolio targeted at meeting your child’s education expenses, you need to keep the following tips in mind -

  • Go for a minor account
  • Make SIP investments
  • If your child will be eligible for college enrollment within 5 years, opting for debt and balanced funds would be the best bet.
  • If, however, you have more than five years at hand, you can create an aggressive portfolio, consisting of mostly equities and one or two debt funds (preferably one).
  • Reviewing the portfolio on an annual basis is highly advisable. If a fund underperforms for three consecutive years, terminate the SIP.
  • Transfer the surplus in your equity and balanced funds to debt funds, prior to two years of the commencement of the child’s college education.
  • Lastly, keep increasing the SIP invested amount annually. This amount can be distributed among all the good funds you have in your portfolio.

An amazing alternative is to go for ready-made children’s plans available in the market. These plans are designed in a way to enable parents to choose options based on their investment capacity and convenience.

Below, you find three top-performing mutual fund child plans.

Source: Swaraj Wealth Research

The first in the table, ICICI Prudential Child Care Plan, is an open-ended fund. It allows you to benefit from both equity and debt funds. The scheme has two options. One called the gift option is suitable for children belonging to the age bracket of 1-13 years, and the other known as the study option is perfect for children in the age group of 13-17 years

The second in the table, that is SBI Magnum Children Benefit Plan, is also a hybrid plan where the invested money goes into equity as well as debt funds. The allocation, however, depends on interest rates, economic conditions, liquidity and other pertinent considerations, including the risks linked to each investment.

The third in the list, HDFC Children Gift Fund-Savings is only for children below 18 years of age.

The plan is targeted at ensuring stable long-term returns by maintaining comparatively lower risk levels by investing about 80 to 100 percent of the investment in debt instruments and about 0 to 20 percent in equity funds.

The table clearly shows that the percentage of returns for every scheme grows with growing number of years. That means the longer the investment period, the higher the returns.

Now, have you paid attention to another striking aspect that the table reflects? The corpus obtained from these funds is indicative of the size of these children plans, which is not really impressive, at least when you compare them with other funds provided by the same fund houses.

This directly points to one thing – not a lot of parents are aware of these funds.

So, the need of the hour is to create more awareness about these plans by their respective fund houses. This will make parents turn to children’s education plans offered by mutual funds.

Conclusion -

If you haven’t already planned for your child’s education, it’s high time you did. The mutual fund industry has two amazing options for the same that you can choose from. But because the plans remain under-promoted, they aren’t opted for by many parents. With proper promotion and awareness, more and more parents will understand the value of mutual fund investment for long-term goals such as higher education of children.

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