Best Mutual Funds to Invest for Education

With the rising demand and value of knowledge, education is getting expensive every year. The inflation in education is possibly higher than household inflation which is deterring the financial preparedness of parents for an aspirational and defined event like education.

Talking of the primary school, per the data of NSSO (National Sample Survey Office), the annual expenditure on the private child has increased by a whopping 200% over the last ten years.

In contrast, the higher education expense has been more amplified during the period.

Thus, it is essential to have a dedicated financial strategy in place for education as one has it for retirement. It would help if you base your strategy on the basis of needs, and implement it with a sound investment portfolio so that over the long term, during your child’s education (India or abroad), the cash flow doesn’t become difficult in your pocket.

Plan for your child’s future needs

1. Know the cost

The most fundamental problem for a parent is not knowing or understanding the total cost that will be incurred in his/her child’s education.

Given that education inflation is much higher than household inflation, it is crucial to assess the cost of education as the necessary first step.

To estimate the cost, a parent should look out for an answer to the following questions –

• Which country do you want to study in? (for example, US, UK, Canada, etc.)
• What degree are you targeting – bachelors or Master’s?
• What type of college are you targeting? (example, rank between 1-5, 5-25, etc.)
• Which course/discipline are you looking at? (for example, Management, Engineering, etc.)
• What is the tuition fees currently of the selected college?
• What will be the future value of the tuition fees when your child goes for education?

To give a simple estimate, a post-graduate program in IIMs during 2010 was in the range of Rs 4-6 Lakhs. A decade later, the program is costing around Rs 22-25 Lakhs.

The same program is likely to cost nearly a fortune a decade from now. Even if the rise in the cost is pegged at 5%, the cost increases to 40 Lakhs for your child’s education at a premier university.

Now, another essential cost that parents tend to miss is the cost of living. The living cost has been rising exponentially, and thus it would be useful to add to the tuition cost provided the accommodation is not likely to be provided by the university.

While the dynamics of the universities may change in a decade or two from now but it is always better to be over-prepared than to be under-prepared and scout for funding options at the eleventh hour using illiquid assets such as real estate.

Thus, it is advisable to add the cost of living that is likely to be incurred should your child go to another city/country for his/her bachelor’ and/or Masters’ degree.

2. Investing in mutual funds for a child’s education

It goes on without saying that mutual funds have been gaining traction over the past few decades and the burgeoning size of the assets under management has made people think of the investment vehicle.

Also, with declining or unfavorable returns on instruments such as fixed deposits, provident funds, and the like, the most lucrative option remains – mutual funds.

However, not all mutual funds would be able to help you achieve your target. Thus, you need to plan as per your risk appetite so that you do not derail from the track of your defined event.

The following are some tips to get started

• Make investment your habit. Similar to how you would pay your EMI and bills on time every month, put aside a small amount every month for different goals. The method is called a systematic investment plan. A SIP works best for both – salaried and business class.
• Now, how do you get how much to invest? Well, it is not very complicated as you may think and neither every number will help you get there. All you need is an investment advisor who can analyze and plan your personal finance. Similar to how Doctor is for a patient, the advisor is for an investor. The advisor focuses on your income, expenses, dependents, liabilities, time horizon, goal amount, and the like to arrive at a risk profile. Based on the risk tolerance, the advisor helps you shortlist the funds that will suit your risk profile.

Benefits of investing by way of SIP

• By investing through SIPs, you will do away with the burden of timing the market as you could then avail the benefit of Rupee Cost Averaging. By investing through SIP, you will tend to invest in the up-market and the down-market. This helps you shy away from the volatility of the market.
• Additionally, you will benefit from the power of compounding, which fundamentally generates returns not only on capital but returns also.

How do you choose the funds for your Child’s Education?

Deciding to invest in mutual funds is only the first step. Selecting which fund to invest in is a broader choice to make.

Hence, you must research how to invest in mutual funds, which funds have delivered remarkable historical returns over the long term, how much risk you can afford, and what your investment horizon is.

The choice must be made depending upon your specific requirements of generating adequate corpus in the long term to fund your child’s education. You must carefully keep a check on the following before you make your decision-

• Look at the time that you have to stay invested in a fund to achieve your target amount. If you have more than ten years in hand, you can consider investing fully in equities as it offers the highest growth potential. However, if you have between 5 and 10 years in hand, it might be more suitable to opt for a balance between equity and hybrid funds.
• Instead of investing in just a single fund, diversify your investments across at least two or three different funds.
• Closer to the horizon, consider shifting from equity to debt funds and lastly when you reach very close to the goal, consider capital protection as objective and not appreciation and look for safer funds such as liquid funds.

When should you plan?

“I made my first investment at age eleven. I was wasting my life up until then”

–    Ace Investor Warren Buffet

When it comes to investing, starting early is the key to ensuring that you’re financially secure. For instance, if you start saving at the birth of your child, in 18 years by investing only 21K per month, you can accumulate as much as Rs 1.5 crore which should suffice for the global education of your child (assuming 12% annual returns).

To sum up, the following are the key points on how to put mutual funds in the task of your child’s education planning –

• The cost of education is rising. Thus, it is crucial to start saving at an earlier date to avoid a future financial burden.
• Do not mix insurance with investment – as you would have seen in multiple cases. Insurance provides risk management, whereas mutual funds provide returns.
• The financial strategy of investing in a mutual fund is a combination of time, risk appetite, income level, and target amount.
• Investing regularly helps keep the market volatility at bay and inculcates investment discipline in your savings plan.

Consult an expert advisor to get the right plan