How do you plan for your child’s education cost well in advance? Currently, if you send your child to a good school for graduation and then for post graduation in India, it would cost around Rs55 lakhs. You can safely assume that in another 15 years, it would be closer to Rs1cr. Similarly, you can also assume that a foreign education in 15 years would cost closer to Rs2.50cr. How do you plan and allocate for such large target corpuses? The answer lies in mutual funds.
Leveraging equity funds for higher education
Since 15 years is a fairly long period, you can always count on the power of equities to reach your goal. Assuming that you can earn around 14% on an equity fund annualized over a longer period of time, what should be your monthly SIP contribution for a complete Indian education and for a foreign education?
|Indian Education||Amount||Foreign Education||Amount|
|Cost of education||Rs1 crore||Cost of education||Rs2.50 crore|
|Tenure of contribution||15 years||Tenure of contribution||15 years|
|Annualized yield||14%||Annualized yield||14%|
|Monthly SIP needed||Rs16,500||Monthly SIP needed||Rs41,000|
If you are currently earning around Rs1 lakh per month, then it is easy planning for an Indian education but planning for a foreign education could be a little difficult. But the advantage here is that this is a passive approach and your SIPs are tagged to the child’s education goals, so they are not disrupted in between. You can ideally opt for a Multi-cap fund since you can afford to take the risk of combining mid caps and large caps for 15 years.
|Multi-cap Fund Name||3-year returns||5-year returns||10-year returns|
|INVESCO Multi-cap (G)||6.27%||8.62%||16.73%|
|IDFC Multi-cap (G)||6.78%||8.11%||14.71%|
|Nippon India Multi-cap (G)||8.53%||6.09%||14.14%|
|Kotak Standard Multi-cap (G)||11.48%||11.54%||13.93%|
We have considered 10-year returns as that is more illustrative when you are planning your child’s education over next 15 years. These are regular funds and if you opt for direct funds you could end up with another 100bps higher returns. So, you could end up earning more than 14% annualized, but that should be a good problem to have.
Planning via dedicated children plan funds
Another way to plan for your child’s future is through dedicated child’s plans. Such child plans help you to do monthly investment so as to reach a target corpus for your child’s education. Unlike the previous case, here the fund manager creates a portfolio of select equity and debt fund and also ensures that the liquidity conversion risks are minimized closer to the goal posts. If you look at the returns of these child plans, they are attractive, although you can say they are sufficient. Check the table below.
|Child Fund Name||3-year returns||5-year returns||10-year returns|
|HDFC Children Gift Fund||9.45%||9.22%||14.93%|
|ICICI Pru Child Care Fund||6.71%||6.71%||12.06%|
|SBI Magnum Child Benefit Fund||8.75%||10.48%||11.06%|
|UTI CCF Scholarship Plan||8.88%||7.83%||10.41%|
The challenge in these child plans is that returns are, on an average, much lower than pure equity funds. That can make a big difference to financing your long term plan. Also, the child plans are structured as fund of funds (FOF) and they can have a bigger impact on the net returns due to unfavourable tax treatment.
Which option should you choose to plan your child’s education?
Child plan funds are simpler and they also offer the added benefit of insurance linked to the child plan. However, the return differential is quite substantial and that is where the equity funds score. It would be a better choice to opt for an equity fund to plan your child’s education and pin a term policy to the plan so that any life risk is also taken care. That will be a better choice from a post-tax planning perspective.