Parents want to ensure a good future for their children and a good education plays a crucial role in that. It might be too early to know what course your child will pursue in the future, but as a parent you should be prepared. Of course there are education loans, but it is important to build a corpus that can come in handy when your child requires it for higher education.
Education costs are skyrocketing, in fact, it is higher than normal inflation. If you have a child who is 3-years old, a course will cost much higher when he or she is 18. Let us say that an Engineering course costs Rs 10 lakh now. In another 15 years it will cost about Rs 27 lakh. A course that costs Rs 20 lakh now will cost about Rs 55 lakh. This is considering an inflation rate of 7 per cent per annum.
Investing regularly in mutual funds is the most prudent way to save for long term goals like children’s education. What you need to do is to figure out how much, you would need for the goal after you factor in inflation. Then you need to assume a rate of returns on your mutual fund investments. You can then calculate how much money you need to save every month for that purpose. Let us say that the required corpus is Rs 50 lakh and your goal is 15 years away. Assuming that the rate of returns on your investment is Rs 12 per cent, you need to invest Rs 10,506 every month. If your goal is 10 years away, you would need to invest Rs 22,318 every month. This also shows that earlier you start investing the better.
While you can invest in mutual funds on your own, there are children mutual funds on offer too. Child investment plans in India aim to inculcate a disciplined long-term investment approach in parents. Most mutual fund houses will offer child plans. These are not much different from taking the mutual fund route on your own. However since it has got ‘child’ in the name, they are popular with parents. People tend to buy child plans since there is an emotional connect.
Most of these schemes are hybrid in nature which means they invest in a mix of equity and debt. Child mutual fund plans have some unique features. In these child plans, the investment is made in the name of the child. Additional KYC is required for this purpose. Child plans also have a higher exit load to discourage premature withdrawals. Child plans also provide an option of lock-in. This is a feature an investor can opt for if he wants to.
If you do opt for this feature, you cannot redeem the fund for 5 years or until your child turns 18, whichever is higher. This ensures that investments for your child’s future are always track. This is a good feature because people tend to redeem mutual funds when the markets are in a bear phase.
Many financial advisors will suggest that you should not invest in a child plan. Rather, they will tell you to invest separately in mutual funds. “I feel it is an emotional way to touch you to invest in children fund, which is never required. We should always invest with logic and keep our emotions out of the way. Moreover children funds are usually balanced funds. Investing for children is usually for above 7 years time horizon and we will always prefer pure 100 per cent equity fund over balanced fund,’ says Anath Ladha, Founder, Invest Aaj For Kal.
How much one should invest in equity and debt would depend on one’s risk appetite and time horizon. An investor should however decrease the equity allocation and move more of the funds into debt when a few years are left for the goal.