Several times financial advisors recommend investing in any mutual fund for each and every reason. But investing in same mutual funds for different purposes like child’s education, planning for retirement or child’s marriage is the biggest mistake. However, investing in mutual fund keeping in mind the goals such as child education can help in attaining it without any obstruction.
Why plan for a child’s education?
Firstly, it is important to know the reason behind planning for the child’s education. The young parents who are planning to send their child to school or the child is already going to school, always desires to ensure quality education for the child. Although, there is a consistent rise in the school fees, yet, the parents have to plan the child’s education within their present salary. The situation is especially difficult when the child opts for higher education such as medical, engineering or foreign degree. The expenditure at such stages can reach few lakhs to even one crore, depending upon the course chosen by the child. Hence, it is important to know about the best mutual funds investment plan, for the child education.
Secondly, it is important to have a rough idea about how much money will be needed for the education of the child. For this purpose, one needs to calculate by keeping in mind the present expenditure along with a 10% rise in inflation every year. This amount should also include an extra 10-20% of it. For example, if the current educational expenditure is Rs 10 lakh and the person wants to calculate the value after five years, it would be 10 lakh 10% increases in the amount for every year + Rs. 2 lakh additional amount. The planning can be done in a similar way for any other educational plan. The best mutual fund plans can help in getting the desired returns.
Thirdly, the investment should be based on the tenure. This means the time when money will be actually needed should be kept in mind which can be acquired through the mutual fund investment.
Types of mutual fund for a child’s education based on the age of the child
- For the child between 0-5 years: The parents can be described in three categories:
- The newlywed couple planning the child in coming few months.
- The couple with a newborn baby.
- The couple with a child below 5 years.
- Goals: Such couples are planning for the expenditure which may arise by the time the child will complete his/her schooling. This means the educational expenditure will come when the child reaches 17 years of age. The best mutual funds to invest can help in attaining the child’s educational goal.
- The time period for investing:
- If the child is below one year, the investment has to be made for 17 years.
- If the child is of 5 years, it has to be made for 12 years.
- Hence, the investment period for this category is 12-17 years. As, it long-term tenure, the person can select between large cap, mid cap and small cap. Even the mutual fund can also be diversified.
- Money to be generated during this time frame: There is no guarantee regarding the returns from a mutual fund. Anyhow, those investing for a long period, say 8 years can expect high returns between 12-15% based on the ups and downs in the market. The mutual funds plan can help in getting:
- In case the person is investing Rs. 5000 every month through SIP for twelve years, he can expect Rs 16-20 lakh (i.e. 12-15% returns).
- In case the person is investing Rs. 5000 every month through SIP for seventeen years, he can expect Rs 33-47 lakh (i.e. 12-15% returns).
- Recommendations: Appendix 1 shows 5 best mutual funds in which investment can be made in large cap, mid cap or small cap; diversified funds and balanced funds. A person can make investment equally in these by selecting the best mutual funds to invest.
- For the child between 6-10 years: The parents can be described in these categories:
- The child has been going to school since the past few years
- The child is studying between 1st-5th class.
- Goals: The person will have actual educational expenditure when the child will do his/her schooling say at the time the child will be 17 years. The person has a financial goal which will help in ensuring the education of the child without any obstruction. The mutual fund scheme can help in attaining the fixed goals.
- Investment term:
- In case the child is of six years now, the investment term is 11 years.
- In case the child is of ten years now, the investment term is 7 years.
It means that the person has 7-11 years as investment term. As the tenure is from medium to long, one can select between large cap, diversified funds and balanced mutual funds. It is better to avoid midcap or small cap as the tenure for seven years can be risky. Anyhow, if it is for eleven years, any one such fund can be added.
Money to be generated during this time frame: as there is no guarantee of exact returns from mutual funds, one needs to be careful in this regard. In case the person is planning for above 8 years, good returns of 12-15% can be expected based on the market conditions. The best mutual funds to invest can help in getting:
- In case the person is investing Rs 10,000 for every month in SIP for seven years, Rs. 13-15 Lakhs (i.e. 12% to 15% returns) can be expected.
- In case the person is investing Rs 10,000 for every month in SIP for eleven years, Rs. 27.5-33.6 Lakhs (i.e. 12% to 15% returns) can be expected.
- Recommendation: Appendix 2 can be referred for knowing about 5 best mutual funds. These spin across large cap, diversified funds and balanced funds. A person can equally invest in all of them. One can select the mutual fund schemes, for attaining the desired goals.
Hence, the child education should be planned beforehand and the investment should be made carefully. The tenure of the investment and desired expenditure should be kept in mind while planning for the education of the child.