Topic 2: Mutual Funds: An Amazingly Effective Way To Fund Your Child’s Education
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 spiraling 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.
Thirty years ago, when our parents focused 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.
With the cost of education spiraling 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, is one of the most viable options to create wealth for the long term.
Equity Mutual Funds are a compelling investment option for two reasons:
Here are some benefits of investing in Mutual Funds:
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:
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 spiraling 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.
Thirty years ago, when our parents focused 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.
With the cost of education spiraling 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, is 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 tax-free
- The approximate dividend yield on equities is 1-1.5% annually. 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 under-performing for a year then there’s no reason to panic. Consider terminating the SIP in the fund only if the under-performance 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. 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.