In terms of personal finance, it appears that funding a child’s education is the most important responsibility that cannot be neglected. While making financial plans for a child’s education, one can aim for maximum return investment with less risk. In this case, mutual funds are the best investment option as they have a history of surpassing the benchmark index and inflation in terms of returns. Before investing in mutual funds, parents should take into account many other factors besides starting savings as early as possible, such as the age of the child, educational path, investment horizon, ability to accept risk, asset allocation and capital accumulation. for the future goals of the children. Fixed deposits are the standard instrument for long-term goals, but due to rising inflation, the RBI in its MPC meeting in August increased the repo rate by 50 basis points, raising the bank’s fixed deposit interest rates.
Although the average long-term return is only 7.5%, which is taxable income, and after retail inflation, as measured by the Consumer Price Index (CPI), rose to 7% in August, the average fixed deposit return is not a qualifying one. deal. The Nifty 50 index, on the other hand, has returned 13% (CAGR) over the last ten years, with a 10-year rolling return of 17% and a CAGR of 15% over the last 20 years, indicating how the equity market has performed. in the long run. Through mutual funds, you can hedge your risk profile and get exposure to equity markets through systematic investment plans (SIPs). However, there are a variety of funds available in the market, so which one should you choose for your child’s education? let’s find out.
Commenting on the subject, Abhishek Dev, Co-Founder and CEO, Epsilon Money Mart Pvt Ltd said, “There is no easy answer when it comes to saving for your children’s education. There are so many factors to consider such as time frame, area of expertise (medicine will cost a lot of commerce!) and of course, the dream of many parents – to send their kids abroad and let them study there. , where the currency fluctuates. Will play a role too.”
Which mutual fund category is best for a child’s education?
Equity funds are divided into several categories, each of which has a particular risk profile, even though all equity and equity-related instruments are sensitive to market risks. Several well-known categories of equity funds include large-cap funds, midcap funds, small-cap funds, large and midcap funds and multi-cap funds. However, solution-oriented mutual funds, according to Mr. Abhishek Dev, are beneficial for children’s education. As per SEBI, there are four categories of solution-oriented and other funds: retirement funds, children’s funds, index funds/ETFs, and funds of funds (domestic/international). A minimum lock-in period of 5 years is mandatory for the Children Fund category or till the child attains majority, whichever is earlier.
As for a better investment strategy for a child’s education, Mr. Abhishek Dev said, “The easy way to do this is by simply investing in solution-oriented mutual funds that focus on children’s education. You have the one from Aditya Birla. Some of the largest AMCs offering this type of fund are ICICI, HDFC, SBI, Tata, UTI etc. Typically, with a judicious mix of equity and debt in their underlying portfolio, these funds have given average returns since inception. Since 14.9% (category average). Typically, these funds also have a minimum lock-in period (i.e. 5 years) and can be extended till the child becomes an adult. Tax benefits may be available for such funds “
Pros and Cons of Solution-Oriented Mutual Funds
Only those who are on a path to achieve long-term goals by including a lock-in period can use solution-oriented mutual funds. Since the fund manager is allowed to invest and invest in both equity and debt instruments, the allocation ratio may change depending on the age group of the investors, resulting in the primary objective of wealth creation and stability in the long run. Some solution oriented mutual funds offer tax benefits, due to the lock-in period of 5 years one can claim tax deduction 1.5 lakh per annum under section 80C. But before investing, one must carefully examine the performance of the fund, the history of the fund house and the associated charges, such as entry and exit loads, expense ratio, etc.
Abhishek Dev, Co-Founder and CEO, Epsilon Money Mart Pvt Ltd, said, “The limitation of this approach is that you are completely dependent on the call of the fund manager and the fund may not perform well when you need to redeem The second issue is lock-in, if some money is required as an emergency then it may not be possible to redeem before the 5 year period. Another way to do this is through the estimated time Tenure and how much amount you think you would need and build a dedicated portfolio for this goal of children’s education.There are enough and more calculators online that will help you determine the final amount you need to invest based on the time period (Please keep inflation in mind). Here you, although your wealth manager, will be in better charge of your portfolio. However, you will need to work on rebalancing your portfolio – making it more debt oriented as you get closer to the target “
Which type of investors should invest in Solution Oriented Mutual Funds?
Investors who are specifically interested in achieving long-term financial goals are well suited as the fund includes primary objectives. Due to its short-term volatility, equity funds may not be considered suitable for achieving short-term financial objectives and are therefore not recommended for short-term investors. Due to the lock-in period, investors cannot switch to other funds and even make premature withdrawals in case of unforeseen emergencies, even if a scheme underperforms its benchmark index. Do you do
Abhishek Dev said, “Risk tolerance is completely different for each individual and depends on the investor. However, if the investment period is more than 10 years then higher investment in equities can be viewed as an asset class. Because equities give better returns in the long run and can help you achieve your goals in a better way.”
How to start investing in Solution Oriented Mutual Funds?
Financial advisors highly recommend the SIP route when it comes to mutual funds as it enables you to experience the power of compounded, low initial investment. 500 per month, rupee cost averaging across various market scenarios, higher returns and flexible investment strategy through SIPs as compared to traditional fixed deposit/small savings schemes.
Abhishek Dev said, “Suppose SIP is a good way to invest – whether for children’s education or any other long term goal. The discipline of investing is embedded in this approach and also the power of compounding and averaging will help you to reach your goal. It helps to reach better because returns are also able to generate returns on them!Given that the cost of education is skyrocketing, most of us may not have the privilege of lump sum investment.Also, since this The target time period can be more than 5 years, so SIP can be a good approach when it comes to planning your children’s education.”
Disclaimer: The views and recommendations given above are those of individual analysts or broking companies and not of Mint.
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