As we have stepped into 2024, although the year has changed, what has remained constant is parents’ worry about rising inflation and education costs. Despite the uncomfortably high inflation (5.69, general, as of Dec. 2023), these rising figures do not reflect the hardship brought on by rising education costs. According to one news article, education inflation is higher(twice) than the inflation rate. Education costs include tuition fees, co-curricular fees, and other fees. Parents can consider the investment a suitable tool to mitigate these worries and the inflation risk.
When parents start investing in their child’s future early, it is always beneficial as they will see the magic of compounding over the years. Along with inflation, the return on investment will also rise. One can beat rising inflation by making the right decision at the right time.
Generally, when a person wants to start investing, there are a few parameters that he needs to keep in mind before planning.
What amount does an investor want to invest?
The investment amount should be pre-decided, like the amount you are ready to start your journey. (E.g. An investor can start an SIP with an amount as low as ₹100)
What is the time horizon?
The asset class to be invested in will depend on the time horizon. Generally, the longer the time horizon, the greater the risk an investor can take and vice versa. Therefore, the investor should decide when he would require the money, and based on that, he can consider the risk he can undertake.
What is the risk appetite of that investor?
Every asset class has different risk characteristics. Few asset classes are considered highly risky, such as equity funds, but rewarding, whereas few other asset classes, like debt funds, can be less risky but have low return potential. The risk appetite will depend on factors such as time in hand, the financial position of the investor, the amount of investment, certainty of the cashflows or income, etc. Considering these factors, the investor should decide his risk appetite and which asset he can invest in.
Considering this, the following are a few investment options that people generally undertake:
- FD (Fixed Deposit) – A traditional tool of investment that provides steady returns of 5-7% over the period, but the return on FD generally fails to beat inflation.
- PPF – A secure investment that provides a 7-8% (est.) return on your investment. It falls under the EEE(Exempt-Exempt-Exempt) concept, which means the principal amount, the interest earned, and the maturity amount of PPF are completely Tax-free.
- LIP – Endowment plans are offered by life insurance companies that facilitate both risk protection and investment options, and many people consider these for the child’s investment planning.
- Gold – Gold is one of the most popular investment options that act as a hedge against inflation.
- Real estate – Although real estate provides decent return potential, it has limitations, such as high-ticket size, high transaction costs, high maintenance costs, illiquidity, etc.
If we look at all the above asset classes, they all come with various limitations, the primary and the most important being their underperformance against the elevated education inflation. Therefore, the investors lose their money in real terms if the investment cannot beat the education inflation, which is often seen in the case of the above asset classes. However, one asset class offers a solution to this and many other problems.
- Mutual Funds - Investment in mutual funds is an excellent option. Mutual funds offer different products for the different needs of the investors. There is always a product available for every need of the investors. For example, investors can consider debt funds for short-term time horizons, which offer better return potential than bank deposits with lower risk. Hybrid funds can be considered for medium-term time horizons, providing limited growth potential and portfolio stability. Equity funds are suitable for long-term time horizons, which provide high growth potential with reduced volatility over a longer duration. Apart from this, mutual funds offer benefits such as professional money management, liquidity, diversification, lower ticket size, etc. Thus, parents can start their investment journey by regularly investing through SIP or one-time investment through lumpsum.
Top Performing Mutual Funds
Following are some of the top-performing mutual funds from different categories:
| Fund Name | Category | Sub-category | Inception | AUM (Rs Cr) | Expense Ratio | 3Y Return | 5Y Return |
| Nippon India Small Cap Fund | Equity | Small Cap | 01-01-2013 | 43,816 | 0.67% | 41.76% | 30.94% |
| HDFC Mid Cap Opportunities Fund | Equity | Mid Cap | 01-01-2013 | 56,033 | 0.80% | 32.32% | 24.97% |
| SBI Contra Fund | Equity | Contra | 01-01-2013 | 21,482 | 0.69% | 32.20% | 26.29% |
| DSP Nifty 50 Equal Weight Index Fund | Equity | Index (Large) | 23-10-2017 | 1,004 | 0.40% | 21.79% | 18.48% |
| HDFC Balanced Advantage Fund | Hybrid | Balanced Adv. | 01-01-2013 | 73,349 | 0.80% | 26.29% | 19.43% |
| ICICI Prudential Multi-Asset Fund | Hybrid | Multi-Asset | 01-01-2013 | 30,650 | 0.84% | 25.51% | 19.79% |
Note – All are Direct Plan and Growth Option; AUM and Expense ratio are as of December 31, 2023; 3Y/5Y returns are annualized and as on January 29, 2024
Source – valueresearch.com
Nippon India Small Cap Fund
- Nippon India Small Cap Fund is among the best performers and has consistently outperformed the category over the last 1/3/5/7/10 years.
- It has delivered the highest returns in the category over the last 7 and 10 years and has been in the top 3 over the three and 5-year period.
- The fund has delivered the best risk-adjusted returns over the last three years, depicted by the highest Sharpe ratio.
HDFC Mid Cap Opportunities Fund
- HDFC Mid Cap Opportunities Fund is the largest fund in the mid-cap space with an AUM of Rs. 56,033 crores and is the only fund in the category to have an AUM of more than Rs. 50,000 crores.
- The fund has consistently outperformed the category and the mid-cap index over all the 1/3/5/7/10 years.
- The fund has delivered better returns per unit of risk, depicted by the lower standard deviation and the beta compared with the category average.
SBI Contra Fund
- The fund follows a contrarian strategy while investing in equity and provides exposure to companies of all sizes.
- The fund has been in existence for approximately 25 years and has generated a since inception return of 17.13% for its direct plan as of January 29, 2024.
- The fund has delivered the best risk-adjusted returns in the category, as depicted by the highest Mean Return, Sharpe Ratio, Sortino Ratio and Alpha.
DSP Nifty 50 Equal Weight Index Fund
- This fund tracks the Nifty 50 Equal Weight TRI, providing exposure to large-cap equities where the probability for alpha generation is very low.
- Compared with the Nifty 50 TRI, the Nifty 50 Equal Weight Index TRI has delivered better returns with lower volatility over a long-term period.
- The fund has delivered an alpha of 4.23%, whereas the other funds in the category have barely managed to generate the alpha in the last three years.
HDFC Balanced Advantage Fund
- HDFC Balanced Advantage Fund is one of the oldest funds in India and is the largest fund in the balanced advantage category, with an AUM of Rs. 73,349 crores.
- The fund has been the top performer in the category for over 1/3/5 years and has delivered an impressive return of 16.15% for its direct plan since its inception.
- Although the fund has been volatile more than the category, it has delivered a significantly higher alpha of 10.98% compared to the category average of 2.62% over three years.
ICICI Prudential Multi-Asset Fund
- ICICI Prudential Multi-Asset Fund has the largest AUM of 30,650 crores in the category.
- The fund provides exposure to various asset classes such as equities, debt, real estate, commodities, etc.
- It has delivered a significantly higher alpha of 11.90% against the category average of 4.70% over the three years.
Note: All the details of the funds mentioned above are of direct plan growth option unless otherwise specified and as of January 29, 2024.
Source: valuereasearch.com
Investing in your child’s future will provide a world-class education to help them remain competitive among peers. Here, competitive means allowing them to be well-settled with their career choices and to live a confident and happy life. The sooner you start, the better you can provide for your child eventually.
Choosing the right plan and sticking to your investment decision will reward you with an extensive corpus. Investors can research before selecting any fund or consult a financial advisor who can give investment advice suitable to their risk appetite.
Happy Investing!
Disclaimer – Mutual Fund investments are subject to market risks, read all scheme related documents carefully. The past performance of the mutual funds is not necessarily indicative of the future performance of the schemes. The mutual fund schemes mentioned are only for educational and informational purposes, and no investment is recommended.
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