If you have kids, saving up for retirement so that you can lead a financially independent life post-retirement, may not be enough. You need an education fund as well. We’ll tell you why.
If you’re in your late twenties and plan on having a child, or if you already have one, saving up for a retirement corpus that will help you lead a financially independent life cannot be your only financial goal.
With the cost of education spiralling today, pooling a portion of your savings or income into an education fund for your child is essential. We’re going to tell you how to go about it using Mutual Funds.
Additional Reading: How To Make Mutual Funds Do The Hard Work For You
Thirty years ago, when our parents focussed on creating a corpus for our education or marriage, they depended on investment options like Fixed Deposits, Public Provident Fund (PPF) or physical gold to meet these goals. While these are perfectly safe, long-term investment options, the returns on these are as low as 6-7%. So, while the education fund is safe, the money doesn’t multiply.
Let’s get some context here. The batch of 2018 at the Indian Institute of Management, Ahmedabad (IIM A) paid a whopping Rs. 19.5 lakhs for their two-year course. This is a 400% jump from what the elite B-school charged in 2007. This number will become Rs. 95 lakhs in 2025.
With the cost of education spiralling at more than 20% per year, parents need to explore investment instruments that will yield considerable returns over a span of time and meet their financial goals. Mutual Funds, in this respect, are one of the most viable options to create wealth for the long term.
Equity Mutual Funds are a compelling investment option for two reasons:
- Capital gains on the sale of equities with a holding period exceeding one year are taxed at 10% if the gains are over Rs. 1 lakh.
- The approximate dividend yield on equities is 1-1.5% annually.
Additional Reading: Choosing Between Various Categories Of Equity Mutual Funds
Opposed to what is commonly believed, you don’t need to be a financial wizard to taste success with Mutual Funds. Mutual Funds are managed by professionals who have the expertise and foresight to invest in the right kind of stocks. Your money also gets evenly distributed across risky and safe stocks and sectors.
Here are some benefits of investing in Mutual Funds:
- Investments are made by seasoned fund managers on behalf of investors after discussion, research and analysis.
- Mutual Fund portfolios are well-diversified. The risk is thus spread over various types of stocks.
- An education fund needs flexibility, which is possible with Mutual Funds.
- Despite short-term volatility, long-term Mutual Funds are ideal as they generate the highest returns.
- The minimum dividend yield on a pure equity Mutual Fund investment is around 10-12%.
To start investing in Mutual Funds, parents can either create a portfolio exclusively for the purpose of funding their children’s education or to invest in specific children’s plans offered by fund houses.
Here are the steps to set up and maintain an education fund using Mutual Funds:
- Open a minor account that can be operated jointly by both parents.
- Set up SIPs for amounts that can be comfortably borne by the both of you.
- Review SIP contributions every year and try to step them up every year.
- Review investment performance and asset allocation at regular intervals (about once a year). If a fund has been underperforming for a year then there’s no reason to panic. Consider terminating the SIP in the fund only if the underperformance continues for 3 years.
- You can move the funds to a liquid fund a few months prior to pay out
A few things to note: The amount you will have to save every month would depend on how near in the future you would need to use those funds for your child’s education.
If you’re going to need it 8 years from now, you’ll need to save more than what you have to if you are looking at a timeline of 12-15 years. If you don’t know the fund amount that you will need to aim for, start by researching on the kind of courses that you would want your child to pursue based on his interests and the costs involved in it.
Additional Reading: Why Mutual Funds Score Over Stocks
When it comes to investing, the sooner you start the better. Remember, a delayed start will not only leave you with an insufficient corpus but will also put at risk your other financial goals. If you start saving for your child’s education well into your 40s, you may fall short of the required amount.
Not sure about Mutual Funds? You can consider Fixed Deposits or take a look at current interest rates for Recurring Deposits on BankBazaar.