Is it necessary to save for your child’s education? Why should you save for your child’s education when they only identify colours and break your heart with their toothless smile? Why is it important to start early and save to fund their bright academic career?
These are some common questions every parent or parent-to-be has been asking us. In this blog, we shall share why you need to save 10 years in advance for your child’s college and an easy hack for doing it effortlessly. Read on!
How much would you spend in your child’s college education?
Education has become very expensive in India, and the cost is increasing by 10-12% yearly. A recent report of 2020 by NSSO revealed that education costs had increased 2.75 times since 2008. In contrast, per-capita income had only increased by 2.49 times during the same period.
Scary? If not, let us show you how much education cost has changed over the years.
Estimating expenses in the Indian scenario:
|IIM A (2 years)||4.3 lakhs||23 lakhs||434|
|IIT (Engineering) – 4 years||3.6 Lakhs||8 Lakhs||122|
|Medicine||3.5 Lakhs||18 Lakhs||514|
Now, if you have a one-year-old child, you would need at least Rs 42 lakhs to pay their engineering tuition fees 17 years later. (the least of the above).
Students cannot fulfil their dreams due to the debt threat looming over their working years, which could also form a more significant burden to their parents. The trend would continue for the near future, ballooning the fees even further.
How do we fight this educational inflation?
Investing is a mantra that can be followed to rise above the tide of this soaring educational Inflation. A rich corpus is accumulated, and the effects are more prominent when the investor starts saving at an earlier stage owing to the compounding effect.
As a parent, one should prefer to invest in mutual funds instead of child plans. Child plans are insurance policies that promise a lumpsum amount at the end of policy maturity or secure your child’s future in case of any unfortunate event to their guardians/parents. These cannot aid in building a corpus for your child to reduce your financial burden in the future. Whereas mutual funds aid in growing your invested capital into a wealthy corpus by delivering high returns over a diversified portfolio. You can choose to invest a portion of your savings into a child’s plan, which can be utilised in case of an untimely demise of a parent or guardian, but invest a significant portion into investment vehicles that grow your investments.
Mutual funds pool money from different investors and invest in various securities, such as fixed income, equity, equity-related instruments, etc., to provide a high long-term return on the invested pool of capital. Mutual funds have various advantages over traditional RDs and other instruments. One can start investing in mutual funds through the SIP route as a parent.
SIP provides many advantages
1. Forms an investment discipline by debiting a fixed amount from your bank account at every periodic interval (daily, monthly, quarterly).
2. Benefit from Rupee cost averaging – where the cost of purchasing a unit of the fund is averaged over the time horizon, thus protecting its investors from volatile market conditions and price fluctuations.
3. Benefit from the compounding of returns, where the returns earned on the invested capital are re-invested into the fund.
Consider the following example
A parent is investing for a child who is currently a toddler of age 5. They would be pursuing their undergraduate degree at 18, 13 years from now. If the parent invests Rs 5000 per month in a SIP for 13 years, they would be accumulating over Rs 20.68 lakhs.
|Current Age of Child||5 years|
|Pursuing Graduation||18 Years|
|Time Horizon||13 years|
|After Redemption when the child is 18 years old|
|Wealth Created from returns and compounding||12,88,401|
Source: EduFund Research
Deciding to invest in mutual funds:
1. Instead of sticking to one fund, diversify your portfolio and invest in 2-3 mutual funds by allocating your SIP amount proportionately.
2. Your investments could be predominantly dominated by diversified equity funds with smaller amounts invested in small and mid-cap funds. Small and Mid-cap funds provide high returns (but carry a higher risk). In contrast, diversified equity funds provide stability with lower returns. A risk-averse investor can also opt for a hybrid fund, which offers higher stability (lesser risk) when compared to the previous option. However, the returns are lower than equity funds. Invest in the funds based on your risk appetite
3. The investment horizon should also be considered before investing. If you plan to invest for 5-10 years, then a balanced fund (with debt and equity investments) would be a more suitable option, whereas if the tenure is for over 10 years, investing in a pure equity fund would be more suitable. The higher the time horizon, the more equity volatility is smoothened over the period. Equity funds provide the highest returns in the category of mutual funds.
Some of the Equity mutual funds are as follows (It is not a recommendation, and the investors are requested to conduct their due diligence or consult their advisor by booking a free call on EduFund App)
|Funds||3 Yr Ret (%)||5 Yr Ret (%)|
|Axis Midcap Fund||17.61||15.14|
|Axis Small Cap Fund||24.62||18.63|
|Canara Robeco Bluechip Equities Fund||15.88||13.75|
|Canara Robeco Small Cap Fund||34.46|
|PGIM Ind Flexi Cap Fund||22.01||14.44|
|PGIM Ind Midcap Opportunities Fund||31.74||17.44|
|Quant Active Fund||33.61||20.76|
|Quant Flexi Cap Fund||35.43||18.14|
|Quant Mid Cap Fund||34.13||20.23|
|Quant Small Cap Fund||51.68||24.3|
|UTI Mastershare Fund||14.27||10.61|
|UTI Nifty 50 Index Fund||14.41||11.15|
Note: All returns are annualized; as on January 25, 2023
A robust financial strategy would be constant in this ever-changing and evolving process. The strategy would factor in your income, target corpus, investment horizon, and risk appetite. The right plan would not be for a particular duration or only for a particular asset class; it would be tailored to your child’s dreams. Starting early in terms of investments lowers the financial burden in the future. There is no appropriate or suitable time to start investing in your child’s education because the right time is now.