Mutual funds investment: How to fund child’s future; 2 steps to great relief

By: | Published: November 20, 2017 4:05 AM

The core of your child’s education corpus should consist of two or three top multi-cap funds as these can invest across all market capitalisation and sectors.

Mutual funds, Mutual funds investment, fund child's future, higher education fund, education loans, EMIs, Mutual funds, PPF, child plans, education corpus, SIP, investmentWhile students plan and prepare for their higher education well in advance, the question parents need to ask themselves is whether they are preparing adequately to support their child’s education.

While students plan and prepare for their higher education well in advance, the question parents need to ask themselves is whether they are preparing adequately to support their child’s education. While parents who do not have enough funds to finance their child’s education can always look at education loans, the resultant EMIs that will easily run into tens of thousands per month is likely to be a big burden at the later stage of their life. What parents need to do is create a separate corpus for their child’s future education plans at least 10 years in advance. So, if your child is 10 years old, and you have not started preparing for his education, you are already late.

Mutual funds, PPF, child plans

Contrary to the public perception, PPF is not a fixed-income instrument. Its interest rates are reset every quarter based on the 10-year government bond yields. With higher education sector registering an inflation rate of over 10% p.a., PPF returns of 8–9% p.a. may prove inadequate for funding your child’s higher education. Equity mutual funds are a superior alternative as they have easily beaten the inflation rate in the higher education sector by a wide margin in the last decade. For example, mid cap funds have generated an average annualised returns of about 23% and 12% p.a. over the last 5-year and 10-year periods, respectively. Although, unit linked child plans can also generate higher returns than PPF, their high mortality cost and higher expense ratio does not allow them to outperform mutual funds. Instead, opt for a combination of term plan and mutual funds to get higher protection cover and better returns than child plans.

Managing education corpus

Fix target corpus, investment horizon: Although it is difficult to predict the career path to be chosen by your child in future, you can identify two to three current lucrative career options and find out their current cost. Inflate the costliest of them by compounding their current cost @ 15% p.a. for the number of years left for your child’s higher education. Once you arrive at the ballpark figure, you can easily find out your required monthly contribution with the help of online SIP calculators. Determine your asset allocation: Your asset allocation strategy should be based on your own risk appetite and investment horizon. As equities can be very volatile and even lead to capital erosion in the short term, invest in equity funds only when your child’s higher education is at least five years away. Opt for equity hybrid funds if you have a low risk appetite. Invest in debt funds if your child’s higher education starts within three years.

Select funds according to risk appetite: The core of your child’s education corpus should consist of two or three top multi-cap funds. As these funds can invest across all market capitalisation and sectors, they can align their portfolio according to changing market conditions. Adding one or two mid cap fund to your corpus will help in increasing the growth rate of your corpus. However, stick to large cap funds if you have a low risk appetite for equities. Select funds which have consistently beaten their benchmark indices and peer funds over the last three- and five-year periods.

Ensure to invest through SIPs: SIPs allow you to generate wealth through regular investments on pre-determined dates over a period of time. This eliminates the need for actively tracking the market and allows cost averaging by buying more units on market corrections. Invest lumpsum during market corrections to further reduce your cost of existing investments and achieve your target corpus sooner.

The writer is CEO & co-founder, Paisabazaar.com

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