The journey of parenthood is a beautiful one, filled with moments of joy, challenges, and the constant desire to provide the best for your child. One crucial aspect of this journey is planning for your child’s future, especially their education and college. With the ever-increasing cost of higher education, it’s essential to start saving early. This brings us to the question: Should you be investing in mutual funds or stocks for your child’s college fund? Let’s delve into the details to help you make an informed decision.
Understanding mutual funds and stocks
What are mutual funds and stocks? What is the difference between the two investment options? Are mutual funds better than stocks because they are cheaper and professionally managed? Are stocks more profitable than mutual funds because they allow you to invest with the company directly? Before we dive into the comparison, let’s briefly understand these two investment avenues.
Mutual Funds
- A mutual fund is a pool of money collected from multiple investors and invested in various securities like stocks, bonds, and other assets.
- It is managed by professional fund managers who aim to achieve specific investment objectives.
- Mutual funds offer diversification, which means your money is spread across multiple investments, reducing the risk of significant losses.
- They are generally considered less risky compared to individual stocks.
Stocks
- A stock represents ownership in a company.
- When you buy a stock, you become a shareholder of the company.
- The value of your investment depends on the company’s performance.
- Stocks offer the potential for higher returns but also carry higher risk.
Investing in Mutual Funds vs Stocks | A Closer Look
Choosing between mutual funds and stocks for your child’s college fund depends on several factors, including your risk tolerance, investment horizon, and financial goals. Let’s compare the two based on key factors:
Risk:
- Mutual Funds: Generally considered less risky due to diversification.
- Stocks: Higher risk as the performance of individual companies can be volatile.
Returns:
- Mutual Funds: Offer moderate returns over the long term.
- Stocks: Have the potential for higher returns but also the risk of losses.
Liquidity:
- Mutual Funds: Generally, more liquid, meaning you can sell your units and get your money back relatively easily.
- Stocks: Liquidity depends on the stock’s trading volume. Some stocks may be less liquid.
Expertise:
- Mutual Funds: Managed by professional fund managers, requiring less investor expertise.
- Stocks: Require in-depth knowledge of the company and market trends.
Why are mutual funds a better choice?
Considering the factors above, mutual funds often emerge as a preferred choice for long-term goals like your child’s education. Here’s why:
- Affordability: Mutual fund investments start at ₹100. Individual stocks can be expensive – a single stock in a successful company can cost you nearly ₹1000 to ₹1,00,000, depending on your market value.
- Diversification: Mutual funds spread the risk across multiple investments, reducing the impact of poor performance by individual companies.
- Professional Management: Fund managers handle the investment decisions, saving you time and effort.
- Long-Term Perspective: Mutual funds are generally suitable for long-term investment horizons, aligning with the goal of saving for college.
- Accessibility: Mutual funds are easily accessible through various platforms, making it convenient to start investing.
- Less Volatile: Mutual funds are less volatile than stocks. They are diversified to minimize risk which allows you to steadily grow your child’s college savings without stressing over market ups and downs.
Best mutual funds for child education in India in 2024
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.
Introducing EduFund: simplifying college savings
While mutual funds offer a solid foundation for your child’s college savings, choosing the right fund and managing the investment can be overwhelming. This is where platforms like EduFund come into the picture.
EduFund is a dedicated platform designed to help parents invest in their child’s education through mutual funds. Here’s why it stands out:
- Simplified Investment Process: EduFund makes investing easy with a user-friendly app. You can start investing with just a few clicks.
- Expert Guidance: The platform offers guidance on choosing the right mutual funds based on your child’s age and financial goals.
- College Cost Calculator: EduFund’s advanced college cost calculator helps you estimate future education expenses, allowing you to plan your investments accordingly. This tool provides valuable insights into the amount you need to save and the potential returns.
- Transparent Fees: EduFund provides clear information about fees, ensuring you understand the costs involved.
By leveraging EduFund, you can focus on your child’s growth and development while confidently investing for their future education.
Investing in your child’s future is a significant step in responsible parenting. While both mutual funds and stocks offer investment opportunities, mutual funds often provide a more suitable option for long-term goals like college savings due to their diversification benefits and professional management. Platforms like EduFund make the process even simpler and more efficient.
Remember, investing involves risks, and past performance is not indicative of future results. It’s essential to conduct thorough research or consult with a financial advisor before making investment decisions.
By starting early and making consistent contributions, you can significantly increase your child’s chances of achieving their higher education dreams.
