Choose mutual funds to fund your children’s education
Bengaluru-based Assistant Professor Preethi Nair is concerned about her 9-year-old son’s future as the cost of education is skyrocketing.
Due to online classes, families also need to spend on digital tools and these costs are demanding a greater share of the family expenses than in the past and place more burden on the family.
The National Statistical Office (NSO) conducted a survey on Household Social Consumption: Education, (July 2017-June 2018), and it was released by the government in November 2019. It points out that in rural areas; average expenditure per student pursuing a general course in the current academic year was ₹5,240 while in urban areas it was ₹16,308.
In rural areas, average expenditure per student pursuing a technical/professional course was ₹32,137 while in urban areas it was ₹64,763. This not only shows the rural-urban divide, but also the issue of soaring education expenses.
Preethi Nair says, “Due to the current pandemic, we are actually spending more on education. If it continues, I am worried about how the expenses are going to be in future when my son wants to pursue professional courses.”
According to KS Rao, Head, Investor Education & Distribution Development, Aditya Birla Sun Life AMC Limited, “Parents also tend to miscalculate education costs. Mostly, they consider fees as the savings target but forget to consider inflation in tuition fees, travel, accommodation, day-to-day expenditure, exchange rate fluctuations (in the case of foreign education. Their unpreparedness not only results in unfulfilled dreams but also shifts the burden to children in the form of education loans.”
Apart from savings, parents need to plan their children’s education expenses. They also need to consider inflation if they are planning to cover the cost of education after 10 or 15 years.
Though there are many options, parents can consider the Mutual Fund route. Mutual funds will be the right choice for all parents who need to plan their children's higher education. The returns from mutual fund investments are much better than any other savings over a period of time. If the time horizon is more than 10 years, the returns are better,” says C Sathish Kumar, CEO, Tradewise India.
He adds that mutual fund investments give better tax arbitrages during the accumulation stages.
Parents who are conservative can choose to start their investment plan in Children's Funds or Balanced funds. If someone is starting for the next 15 or 18 years, they can even look at Midcap and Small cap funds, since there is a longer time frame available to achieve the goal, Sathish Kumar adds.
Children’s Fund (Solution Oriented Fund) is the subcategory of solution-oriented
mutual funds that give the flexibility of investing in equity-and debt-oriented funds, depending on the risk appetite of investors. “Ideally one should start with the equity since it works well in the long run and switch to debt when the goal term is nearing to avoid any near-term volatility in the equity markets,” explains Mr. Rao.
Cloud-based business services platform IndiaFilings’ COO and HR Head Reeni Samuel says, Risky securities like equity shares will leave you edge over the tension all the time, but mutual funds companies will collect money from investors and the team of mutual funds (i.e Asset Management Companies) will do a proper analysis of less risky companies securities, government securities, and other investment areas like FDs, among others.
“The money received from the investors will be invested in a certain proportion in the securities from the above analysis to mitigate maximum risk. Here also the risk factor will be there, but it is mitigated to the highest possible level. When compared to Fixed Deposits, mutual funds will give more returns but at the same time, you are taking more risk compared to fixed deposits. Risk and reward always go in hand in hand,” Reeni Samuel says.
Start investing early
Sometimes parents think that their children’s higher education is only after a decade or so and why should we worry now? Sathish Kumar recommends starting early. If you start now, then you will spend lesser amount compared to those parents who start after five years.
Sathish Kumar explains, “For instance, let us assume that the required corpus is ₹20 lakh at the age of 20 and let us assume a very conservative return of 10%. Parent A, who starts at the time of birth will need to save a monthly SIP of ₹2,600 or so. Parent B who starts after 5 years after Parent A, needs to put in a sum of ₹4,800 as monthly instalments. Warren Buffet started earning in his life at the age of 12 or so and of late, he repents that he started late. This explains the power of compounding if one starts early.”
Many people do not even understand the difference between ‘Savings’ and ‘Investments’. They often get confused that both are one and the same. Savings are such instruments wherein the returns are defined. Investments are such instruments wherein at the time of your investments you will never get to know what your returns will be, he adds.
Parents should start investing early and should not just save for education expenses.
Mutual funds are the best option and those parents who are confused with the funds; the best thing that they can do is start a Systematic Investment Plan (SIP) now. “An SIP manage volatility well in the long term, provide rupee-cost averaging with dips and ups of the market value and works wonders in compounding in the long term,” adds Mr. Rao
If your child will complete secondary education in another 10 years, start your investment now so that the child can enroll in prestigious institutions and continue her education without any financial constraint.
1) Higher education costs can be anywhere above ₹10 lakh, and parents should also consider inflation and invest accordingly.
2) Since it is a high target and the objective is clear, one can choose a mutual fund scheme to meet the goal. One can also choose an SIP, which is the best option for parents who want to start now.
3) Financial advisors say parents can go for Balanced funds. They can also invest in equity funds and gradually shift to debt funds if you reach near your goal.
This article is part of the HT Friday Finance series published in association with Aditya Birla Sun Life Mutual Fund