Planning for children’s higher education using Mutual Funds

As globalization progresses and the world converges further, career choices have also become limitless. Unlike earlier, children today have such a large exposure to the outside that their career options are also expanding beyond the conventional professions of medicine, engineering, law or research. Education is no longer restricted to one’s country either as today there are a large number of international universities offering interesting and unconventional courses.

An increasing number of students are exploring unconventional career options—from culinary arts to gaming to art restoration. However, amid these limitless choices, the cost of education has also escalated dramatically for higher studies, in India as well as abroad. In fact, according to the National Sample Survey Office (NSSO), the average annual cost of general education surged by 175% between 2008 and 2014.

As a parent, you would want to ensure that your child is able to pursue a career of their choice. This can get financially challenging, particularly considering the rising cost of education. However, there is a lot you can do now to ensure that your child is able to pursue his/her dream career.

Here’s how you can prepare for this financial goal:

Estimating the future costs of your child’s education can be tricky because education inflation has historically been higher than overall inflation. If you look at the numbers and factor in a conservative 8% inflation rate (education inflation was roughly 10–12% between 2008-14), a course that cost Rs.5 lakhs 15 years ago will now cost you nearly Rs.16 lakh.

While it may be tough to narrow down choices for your child when they’re really young, you may consider 2 or 3 options and parameters such as domestic/foreign education, academic/professional degree, and so on. To estimate the expenses, take the highest costing option. Then, factor in the average rate of inflation to arrive at the approximate future amount. Further, it is important to start as early as possible, say when your child is born or has just started school, to ensure you have a long enough period for your investments to compound.

How Mutual Funds can help achieve your goal

If you are investing for your child’s education, it is advisable to invest in mutual funds. This is because mutual funds provide a lot of options with respect to asset classes, asset mix, duration, goals, and risk appetite. Further, mutual funds are managed by professional fund managers, who have the skills and expertise to manage your investments. This can save you considerable time and effort.

Mutual funds offer solution-oriented schemes such as children’s plans which are aimed at planning for your child’s future. These plans typically come with a lock-in period, and therefore, discourage premature withdrawals bringing in the much-needed investment discipline. Further, there are a variety of options available within these plans which can help you choose the equity/debt mix that suits your risk preference.

If you choose to go with regular mutual funds that invest based on asset class, then you can choose from a range of equity, debt and hybrid products. If your child’s higher education is 7 to 10 (or higher) years away, equity mutual funds are preferable. For those who have a shorter investment horizon (typically 3-7), debt mutual funds or hybrid funds may be more suitable. Hybrid mutual funds offer a mix of debt and equity securities in varying proportions and can be chosen based on individual’s risk appetite and investment horizon.

In case, your child is more inclined towards foreign education, then you may want to have foreign currency exposure. This can be conveniently achieved by investing in international mutual funds which invest foreign markets of a single country or countries. These funds offer an easy way to invest in global stocks, sunrise sectors, and growth themes that may not be available to Indian investors.

You can invest in the abovementioned funds via systematic investment plan (SIP). SIP can be particularly useful when it comes to goal-based investing. Once you have a fixed amount (financial goal) in mind, you can back-calculate how much you would need to invest periodically via SIP. You choose the amount, the frequency, and the duration!

When it comes to your child’s higher education, you and your child certainly would not want to compromise. With escalating education costs, this can be a costly affair. Rather than resorting to student loans later, it makes sense to start investing in your child’s future today!

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