Find out the best investment for child education
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Providing your child with a stellar education is an invaluable gift. But with the ever-increasing cost of higher studies, planning for this significant expense becomes crucial. While there are various investment options available, mutual funds stand out as a compelling choice for several reasons. This article delves into the benefits of mutual funds for child education planning, explores different fund types, and provides guidance on navigating this investment path.
Mutual Funds
Mutual funds pool money from multiple investors and invest it in a diversified basket of assets like stocks, bonds, or a combination of both. This diversification spreads risk, offering a potentially higher return compared to traditional savings accounts. Here’s why mutual funds hold a special place in education planning:
- Growth Potential: Equity-oriented mutual funds have the potential to generate significant returns over the long term, outperforming inflation and fixed-income options. This growth helps you stay ahead of rising education costs.
- Flexibility: Mutual funds offer a wide range of investment options catering to varying risk appetites. You can choose aggressive funds for higher growth potential or opt for balanced or debt funds for a more conservative approach.
- Convenience: Systematic Investment Plans (SIPs) in mutual funds allow you to invest a fixed amount regularly, inculcating discipline and leveraging the power of rupee-cost averaging. This makes planning for a long-term goal like education much more manageable.
- Professional Management: Mutual funds are managed by experienced professionals who research, select, and monitor investments. This expertise ensures your money is in capable hands, freeing you to focus on other aspects of your child’s upbringing.
- Liquidity: Open-ended equity mutual funds offer relatively high liquidity compared to some other investment options. This means you can redeem your investments (subject to exit loads) if needed for education expenses.
Choosing the right mutual fund
With a vast array of mutual funds available, selecting the right ones can seem daunting. Here are some key factors to consider:
- Investment Horizon: The time frame until your child needs the funds for education is critical. Longer investment horizons allow for a more aggressive approach with equity-oriented funds. Conversely, shorter time frames necessitate a more conservative strategy with debt funds or balanced funds.
- Risk Tolerance: Evaluate your comfort level with market fluctuations. If you’re comfortable with some risk, aggressive equity funds might be suitable. However, if you prioritize stability, debt funds or balanced funds offer lower volatility.
- Child’s Age: Start investing early to benefit from compounding. For younger children, aggressive funds can be considered due to the longer time horizon. As your child nears college age, gradually shift towards balanced or debt funds to reduce risk.
Types of mutual funds for education planning
- Equity Funds: These funds invest primarily in stocks of companies, offering the potential for high returns over the long term. They are suitable for investors with a high-risk tolerance and a long investment horizon (10+ years).
- Balanced Funds: These funds strike a balance between equity and debt investments, offering a moderate risk-reward profile. They can be a good choice for investors seeking a blend of growth and stability.
- Debt Funds: These funds invest in fixed-income instruments like government bonds and corporate bonds. They offer lower returns than equity funds but are also subject to lower volatility, making them suitable for investors with a shorter time horizon or lower risk tolerance.
- Children’s Funds: These are specific types of mutual funds designed for child education planning. They may offer features like automatic asset allocation adjustments based on the child’s age and tax benefits.
Additional considerations
- Diversification: Don’t put all your eggs in one basket. Invest in a diversified portfolio of mutual funds across different asset classes to mitigate risk.
- Cost Ratio: Choose funds with a lower expense ratio, which reduces the overall cost of investment and improves potential returns.
- Tax Benefits: SIP contributions in equity-linked saving schemes (ELSS) qualify for tax deductions under Section 80C of the Income Tax Act (India).
Best investment plan for child education in India in 2024
What is the best investment plan for child education? What asset should you choose for your child’s higher education savings? Which asset can help you keep up with the growing education costs in India? The answer is simple and highly convenient – it is Mutual Funds.
Mutual Fund is the best investment asset for saving for higher education. Mutual funds have historically given returns of 10-12% over a long horizon. Successfully keeping pace with education inflation rate which is at 10%. Mutual funds are affordable, you can start investing with just ₹100 monthly and increase your investments systematically.
The greatest benefit of Mutual funds is that they are managed by professional fund managers. At minimal cost, you have experts watching your portfolio and making the necessary adjustments to ensure your money grows at the intended pace. Mutual funds’ transparency over costs and its investment strategies is another major benefit. Here are some mutual funds that you can consider you are planning to invest for child education and their college needs.
Sr. No. | Scheme Name | Category | Sub-Category | Inception Date | AUM | Expense Ratio | 1Y Return | 3Y Return | 5Y Return |
1. | Nippon India Small Cap Fund | Equity | Small Cap | 1/1/2013 | 43,816 | 0.67% | 59.3% | 42.60% | 31.57% |
2. | HDFC Mid-Cap Opportunities Fund | Equity | Mid Cap | 1/1/2013 | 56,033 | 0.80% | 53.99% | 33.89% | 25.41% |
3. | SBI Contra Fund | Equity | Contra | 1/1/2013 | 21,482 | 0.69% | 45.69% | 33.46% | 26.70% |
4. | HDFC Balanced Advantage Fund | Hybrid | Dynamic Asset Allocation | 1/1/2013 | 73,349 | 0.80% | 38.43% | 27.55% | 19.72% |
5. | DSP Nifty 50 Equal Weight Index Fund | Equity | Index (Large) | 10/27/2017 | 1,004 | 0.40% | 33.31% | 23.64% | 18.89% |
Note: All are Direct plan and growth option; AUM and Expense ratios are as on December 31, 2023; 3Y/5Y returns are annualized and as on January 30, 2024. Source: Value Research
Note: Mutual fund investments are subject to market risk, please read all scheme related documents before investing. Past performance is not indicative of future results. This is not an investment recommendation.
Fund Details
- Nippon India Small Cap Fund:
- This fund is being managed by Mr. Samir Rachh (Since January 2017) and Mr. Tejas Sheth (Since February 2023) who is an assistant fund manager.
- The fund has provided 27.07% of return since inception and it has 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 3 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:
- This fund is being managed by Mr. Chirag Setalvad who has been the head of equities since June 25, 2007, and Mr. Dhruv Muchhal who is an Equity Analyst and Fund manager for Overseas investment.
- 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 provided a 21.76% return since inception and has outperformed its category and the mid-cap index in all the time horizons of 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 has been in existence for approximately 25 years and has been managed by Mr. Dinesh Balachandran since May 2018 who has 17 years of rich experience in this field.
- This fund has provided a whooping return of 19.59% since its inception date and has outperformed its benchmark S&P BSE 500 TRI in all the time horizon.
- The fund follows a contrarian strategy while investing in equity and provides exposure to companies of all sizes.
- 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.
- 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 16.04% since inception.
- Although the fund has been volatile more than the category, it has delivered a significantly higher alpha of 10.34% compared to the category average of 1.35% over three years.
- This fund has been managed by Mr. Srinivasan Ramamurthy, Mr. Gopal Agarwal, Mr. Anil Bamboli, Mr. Arun Agarwal, and Mr. Nirman Morakhia.
- DSP Nifty 50 Equal Weight Index Fund:
- This fund is being managed by Mr. Anil Ghelani (since July 2019) and Mr. Dipesh Shah (since November 2020).
- This fund tracks the Nifty 50 Equal Weight TRI, allowing us to have exposure to large-cap equities where the probability for alpha generation is very low.
- Compared with Nifty 50 TRI, Nifty 50 Equal Weight Index TRI has delivered better returns with lower volatility over a long-term period from June 2000 to April 2023.
- The fund delivered an alpha of 3.75% whereas the other funds in the category struggled to outperform the benchmark over the last three years.
Important Note: These mutual funds are not our recommendations. Please consult your financial advisor before investing money in mutual funds.
Benefits of child education investment plan
The cost of education is rising rapidly, making it crucial to plan and invest early for your child’s future. Tuition and fees increased more than 2,200% from 1970 to 2020. Meanwhile, inflation was around 600%. Here are 7 benefits of child education investment plan:
- Beat Inflation: Education costs are outpacing inflation. By starting early, you allow your investments to grow and counter the rising costs of universities, colleges, or specialized programs.
- Peace of Mind: Knowing you have a dedicated fund for your child’s education reduces financial stress and allows you to focus on other aspects of their upbringing.
- Power of Compounding: Starting early allows you to leverage the power of compound interest. Even small regular investments can grow significantly over time, thanks to interest earned on interest.
- Flexibility: Many child education plans offer flexible payout options. The corpus can be used for various education-related expenses, including tuition fees, accommodation, or study materials.
- Discipline & Habit Building: Regular contributions inculcate financial discipline in you and teach your child the value of saving for long-term goals.
- Freedom of Choice: A well-funded education plan empowers your child to pursue their desired educational path without limitations due to financial constraints. This could mean attending a dream university, pursuing a specific program abroad, or taking on internships without financial worries.
- Secures Your Child’s Future: Investing in your child’s education is an investment in their future. A good education opens doors to better career opportunities, financial stability, and a brighter future.
Mutual funds offer a compelling and versatile approach to planning for your child’s education. By understanding your risk tolerance, investment horizon, and financial goals, you can choose the right funds to build a robust corpus for their future. Remember, starting early and investing consistently are key to achieving your child’s educational aspirations. It’s also wise to consult a financial advisor for personalized guidance tailored to your specific circumstances.
Disclaimer: This article is for informational purposes only and should not be considered financial advice. Please consult a qualified financial advisor before making any investment decisions.
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