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Mutual Funds
Is investing in Mutual Funds good for children's education plan?
Discover how mutual funds can be leveraged to build your child’s education corpus by focusing on long-term growth.
Key takeaways
- Mutual funds are an ideal investment vehicle for long-term goals such as saving for your child’s education, especially when you begin early and invest consistently.
- Choosing the right mutual fund is a crucial decision. Whether it is an equity, debt, or hybrid fund, invest according to your risk tolerance and financial goals.
- Unlike traditional options such as fixed deposits or recurring deposits, investing in mutual funds offers a more robust approach to long-term wealth accumulation.
As a parent, you will want the best for your child. This also stands true for the education they receive. It is natural that you want your child to excel in their chosen career, and to ensure they achieve this goal, it starts with a good education. In this world of steadily rising costs, education is no exception. To ensure you do the best for your child, the first step is to plan for their education. With a little planning, preparation, consistency, and discipline, you can help your child make the most of the education opportunities available to them.
In this blog, you will learn about the benefits of investing in mutual funds for your child’s education, given the rising cost of education.
Dealing with rising education costs
To deal with the rising education costs, you need a plan. Before you can plan, it is important to determine how much it will cost in the future. After all, a basic tenet of financial planning is to have a goal in mind.
One thing we can all agree on is that the cost of education is steadily increasing with no chance of slowing down in the foreseeable future. These days, kindergarten fees are as high as college fees a couple of decades ago. The annual fee for junior school costs around ₹2 lakhs these days, and higher education is even more expensive.
For instance, college fees for a professional degree can set you back by anywhere between ₹5 to ₹30 lakhs, depending on the institute. This cost further increases when you consider going abroad for higher studies. Apart from education costs, you must also account for school supplies, hostel accommodation, food, transport, etc., if your child decides to study in another city.
When you look at this, it can be overwhelming. But don’t panic because there is a way out. You can increase your financial readiness to deal with the rising education costs by strategically saving and investing.
Why invest in Mutual Funds?
A common conclusion most jump to when it comes to planning for their child’s future is to save. The desire to save is helpful but savings can take you only so far. When you invest, you give your money a chance to grow.
Let’s assume you decide to save ₹5000 every month and put it in a traditional fixed income product earning 7% interest p.a. for 15 years. If you invest the same amount in an equity mutual fund through a systematic investment plan (SIP), the returns will vary greatly.
| Monthly investment | Investment horizon | Total sum invested | Traditional fixed income | Mutual fund SIP | Difference in gains |
|---|---|---|---|---|---|
| ₹5000 | 7 years | ₹4.2 lakhs | ₹5.4 lakhs | ₹6.6 lakhs | ₹1.2 lakhs |
| ₹5000 | 10 years | ₹6.0 lakhs | ₹8.7 lakhs | ₹11.6 lakhs | ₹2.9 lakhs |
| ₹5000 | 15 years | ₹9.0 lakhs | ₹15.9 lakhs | ₹25.2 lakhs | ₹9.3 lakhs |
Note: The example provided is for illustration purposes only. Equity fund returns assumed 12% CAGR. Any projections or calculations shown are hypothetical and should not be considered a guaranteed outcome or financial advice.
As you can see from this example if you want to accumulate a corpus for your child’s education, investing in mutual funds is beneficial. Wealth maximisation occurs in mutual fund investments through compounding. The sooner you start and the longer you stay invested, the greater the rewards. Traditional fixed income products may not outperform inflation, but equity mutual funds give you a chance to do this. As with any other investment, there will be periods when the fund performs well and doesn’t. However, choosing the right investment option and staying invested in the long run delivers results.
| Child’s age | Future cost of education (including an inflation @7%) | Investment horizon (till the child is 18) | Monthly SIP required to meet future goal (@12% CAGR) |
|---|---|---|---|
| Newborn | ₹80 lakhs | 18 years | ₹ 10,500 |
| 3 years | ₹65 lakhs | 15 years | ₹ 13,000 |
| 5 years | ₹55 lakhs | 13 years | ₹14,700 |
| 8 years | ₹40 lakhs | 10 years | ₹17,300 |
Note: The example provided is for illustration purposes only. Any projections or calculations shown are hypothetical and should not be considered a guaranteed outcome or financial advice.
How to choose the right mutual fund options for your Child’s education goal
Time horizon: You can choose equity-oriented funds like large-cap funds, multicap funds, index funds that offers higher potential if your time horizon is more than 7 years. For medium term horizon of 5 to 7 years, hybrid funds work well as they provide benefits of stability as well as growth. If goal is less than 5 years, it is safer to go with debt-oriented funds.
Risk tolerance: If you're comfortable with volatility for better long-term returns, you can opt for equity or aggressive hybrid funds. However if you prefer stability, consider conservative hybrid funds or debt funds like corporate bond funds, gilt funds or short-term bond funds. Some mutual fund houses also offer child education themed funds, which automatically adjust risk as the child grows. These can be considered if they align with your needs.
Review: Review your fund’s performance annually and reduce risk gradually as the goal nears by shifting from equity to debt to protect gains. It is also important to exit underperforming funds if they consistently lag behind their peers and market benchmarks.
Conclusion
Investing in mutual funds is a smart investment decision. It is also an effective way to accumulate and grow an education corpus for your child. However, to make the most of these benefits, it is important to start investing as soon as possible, stay disciplined, and select the right mix of funds.
As with any other investment decision, ensure you consider your risk tolerance and investment objectives before investing. Seeking professional advice and guidance can also come in handy to make smart financial decisions. With mutual funds, you can give your money a chance to grow with the economy. And in turn, this can give your child a head start in life.
Disclaimer: This article is intended solely for informational purposes. The views expressed in this article are personal. Axis Bank and/or the author shall not be liable for any direct or indirect loss or liability incurred by the reader arising from reliance on the content herein. Readers are advised to consult a qualified financial advisor before making any financial decisions. Axis Bank does not endorse or guarantee the accuracy of any third-party content or links included in this article.
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