Why you should Invest in Mutual Fund for your Child's Education?

Last Updated: 2 Jun 2023

Education costs have shot up through the roof in the last few years. Today a 4 year engineering course in a reputed institution costs you nothing less than Rs.15 lakhs. This is just the tuition fees for the course. You will have to factor in additional costs like hostel charges, cost of books and extra activities, incidental expenses and if all these added up your actual cost can be nearly Rs.35 lakhs for a 4 year engineering course. Then there is a post-graduation education which will cost you nothing less than Rs.20 lakhs for a 2 year course. Incidental expenses will be on top of that. Of course, if you study abroad, your costs will be a multiple of this.

Why Mutual Funds are a Great Idea for Planning Child’s Future?

There are a number of reasons why mutual funds remain the best option for saving for your child’s future. Here are a few of them.

1. Mutual funds are largely passive investments and you don’t need to do much other than monitor them.
2. Planning for your child’s future is normally a part of your financial plan and since most of your financial planning is done through MFs, this automatically fits in.
3. The power of compounding works in your favour and hence investments work much harder when it comes to planning for your child’s future.
4. Mutual funds have an advantage in that you can opt for the SIP approach which will give the benefit of rupee cost averaging and also sync with your inflows.
5. Mutual funds offer choice and liquidity and that permits you to shift to more liquid classes of mutual funds as your approach milestone payments.
6. Mutual funds can be mapped to any online portfolio and this makes it a lot easier to track these funds on a real time basis.

In addition, many of the customized child plans come with the added advantage of insurance built into the whole scheme.

Mistakes to Avoid while Planning for your Child’s future

We are all human and bound and prone to make mistakes. However, you must ensure that these mistakes can be easily rectified and don’t cost you too much. The better way is to know the possible mistakes to avoid when you plan for your child’s future. That makes your task a lot easier.

Mistake 1: Underestimating Future Cost Of Education

Education costs have gone through the roof and could only get worse in the next 10 years. Today, a reasonably good education within India will cost nothing less than Rs.60-70 lakhs. All this pertains to a domestic higher education. If you are looking to send your child abroad, then the actual cost will be nearly 3-4 times this amount. It is still reasonable in places like Russia and Australia but places like UK and the US can be very steep. Be as aggressive as possible when you project your cost expectations for the future.

Mistake 2: Overestimating The Returns On Your Investment

Just because your debt fund earned 18% last year or because your equity fund gave 22% last year, don’t take that as a benchmark. You are likely to be disappointed. This is a common mistake people make. It is said that if something is too good to be true then it is possibly not true and this really applies to investment returns. Talk to your financial advisor and get clarity on the sustainable rate of return. Try to be as conservative as possible when it comes to estimating the returns on investments. It is always better to be surprised on the positive side by underestimating returns than to be left short of funds. Always presume that the conservative side of long term returns would sustain. That is all.

Mistake 3: I Will Start Planning My Child’s Future After 5 Years

This is the typical casual approach to planning for your child’s education. Even if you start small it is ok but you must necessarily start early. Ideally, start when you child is around 1 year old so that you have enough time to create a corpus for her. The earlier you start, the more your save and the more you save the more your savings earn for you. This is referred to as the Power of Compounding. For example, if your child is currently 3 years old and if you plan to accumulate Rs.60 lakhs when your child is 18 years of age, you need to save just Rs.12,000 per month to achieve the target. It looks so much more practical when you have time working in your favour.

Mistake 4: Putting Long Term Capital In Bonds And Liquid Funds

Don’t play it safe when it comes to planning over a 15 year period. In this time frame, you can afford to take risk so equity is the right option for you. Equity and equity funds are best suited to outperform over the long term. For instance, if you have a 15 year time frame or a 20 year time frame, there is no point in putting 70% in debt. Look at putting at least 80-85% of your money in equity and equity funds. If you invest too much in debt, you are limiting your return generating capacity and underutilizing your risk taking capacity.

Mistake 5: Investing Lump Sum Rather Than Via Systematic Investment Plans

It is like waiting for Godot. If you think that you will invest in lump sum when you get a large bonus or a large corpus on hand, it is never going to work. Instead of that, you must start off with a systematic investment plan or SIP so that even if you start small, you at least start investing and start watching the money grow. That way you hit two birds with one stone. On the one hand, you start early and make the power of compounding work in your favour. Secondly, you don’t worry about timing the market as the rupee coast averaging (RCA) takes care of the vagaries and the volatility in the market. Go a step further and see if you can also gradually increase your SIP with rising income. That is the smart approach.

Mistake 6: Avoding Regular Review And Rebalancing

Many people erroneously believe that a child plan does not require monitoring and rebalancing like other mutual fund investments. That is erroneous. Planning for your child’s future is not just about returns but also about risks. Investing is dynamic and you need to tweak the equity / debt mix as you go along. When you have 15 years to your child’s education it is OK to remain 75% in equities but not when the milestone is just 2 years away. At that time your debt should be closer to 70% to reduce your price risk. Also, as the scenario changes in the market or in the economy or your own conditions change, your child plan must also change to reflect that.

Mistake 7: I Am Not Bothered About Insurance, Mutual Funds Are Enough

That is a big mistake. When you plan for your child’s future, you need to build in insurance. God forbid, if something happens to you, your child’s future plan cannot be left in the lurch. Don’t ever forget to attach insurance to your child’s future planning. This should be separate from the normal insurance covers you have. Have a unique insurance policy that designed in such a way that even in your absence the child’s future plans continues and it becomes an auto premium payer. This is a very important aspect of planning for your child’s future.