The day you attain parenthood is the best day to start financial planning for your child’s education. Because along with the bliss comes your responsibility to provide wings to your child’s dreams and aspirations. But, education is getting expensive, and you will spend anything from Rs.15 Lac to Rs.1 Cr for your child’s studies considering 11% education inflation. The only option is to invest in high-yielding vehicles to create wealth to meet the soaring costs. And the equity mutual fund through the SIP route fits the bill.Read more
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A mutual fund is an investment vehicle using pooled money from several investors harboring similar goals. Asset Management Companies, also known as Fund Houses, deploy the collected funds to create diverse portfolios comprising market instruments. Professional fund managers strategize asset allocation to maximize profit for distribution among the investors.
Thus, mutual funds are popular today for their track record of delivering higher returns than any other instrument. The best part is even marginal investors can reap benefits using the SIP route. That leads us to understand what it is.
SIP stands for Systematic Investment Plan, an influential investment tool offered by fund houses to attract even small investors into the mutual fund fold. Thus, you make regular small investments, usually monthly, yet benefit from the power of compounding. In addition, SIP is a disciplined saving method where you pay a predetermined fixed amount to the debit of your bank account directly based on your mandate.
As a result, you accumulate a healthy corpus to fund your child’s education over the long term. Then, the fund manager invests your monthly investment in purchasing various asset classes with a potential for higher returns. However, investments in market instruments are subject to risks. So, let us find out the ideal investment strategy.
It is essential to understand how the SIP turns into a substantial corpus over a long period. You can start a SIP for as little as Rs 500 and plan accordingly. However, it all depends on the target set for your child’s future education. Therefore, an illustration will demonstrate how the investment creates wealth little by little.
A small monthly SIP amount adds up to a substantial corpus over time through the power of compounding. In addition, SIPs benefit you from the concept of rupee cost averaging. Your purchase cost averages over time as you invest a fixed amount every month. Thus, you need not try to time the market to make your investments.
Let us take an example to understand how this works.
Suppose you create an SIP of Rs 5000 per month. The following table will give you details on how the investment shapes up in a year through the following grid:
|S No||Month||Monthly SIP (Rs)||Unit Price (Rs)||Total Units|
The unit price range fluctuates from Rs. 20 at the highest to a low of Rs.10 in July. Yet you have 3990 units at the year’s end against an investment of Rs. 60000, which translates to an average unit price of Rs.15.04. However, the value of the units is Rs. 79800, showing a capital appreciation of 33%, despite the fluctuating market. Accordingly, the summary is:
Total invested: Rs. 60,000
Total units: 3,990
Average unit price: Rs.15.4
Unit value: Rs. 79,800
Return on investment: 33%
The key takeaway from the above illustration is that you get more units when the price is low and fewer when high. It evens out over a period and you pay a reduced average unit price.
According to an NSSO (National Sample Survey Organization) report from 2008 to 2014, the annual cost of education increased 2.75 times than the preceding period. However, the per capita income increased only 2.49 times during the same period, thus leaving an imbalance.
The trend will continue in the future, necessitating a saving mantra that will rise above the tide to absorb the soaring educational costs. And the best bet is the SIP for equity mutual funds starting as early as possible to harvest the maximum from compounding.
You can achieve a sizeable corpus to fund your child’s education through SIP’s recurring investment following a regular discipline.
You purchase more units when the market is low and vice-versa, though the monthly investment is constant.
You can start the SIP with Rs.500 initially and increase it every year aligned with your increasing income for a robust corpus. In addition, SIP allows a top-up facility.
SIP is independent of the market, and your purchases follow the emerging trends to corner units accordingly
You benefit from compounding as your returns corner new assets through calculated allocations.
For example, a SIP of Rs.2000 per month can fetch you Rs.27.3 Lac, provided you start the SIP at childbirth and continue for 18 years, the age when your child moves to a college after school. The other variables considered are that the investment increases 10% every year for a total investment of Rs.11.05 Lac, and the average annual returns are a modest 12%.
Thus it is a good beginning as your children will consider college or a university abroad only when 18.
The cost of education is increasing and more pronounced in higher studies and the galloping tuition fees. As a result, many bright minds refrain from pursuing higher education in colleges and universities until their parents have saved well for the eventuality.
And no investment vehicle other than equity mutual funds using the SIP route qualifies to deliver the inflation-beating returns for a hefty corpus. Moreover, professional fund managers use their expertise and experience for diversification to mitigate risks while maximizing returns. Let us study the advantages of SIP for child education.
The funds required for your child’s education also help beat inflation and what better than the SIP investing based on your mandate debiting your bank account directly. As a result, you are free from worrying about payments and the chances of default.
One of the most significant aspects of mutual funds SIP is the rupee cost averaging to safeguard your investment. Regardless of the fluctuations, the factor insulates your investment from market volatility and corners the best assets. Thus, you earn the maximum units when the stock prices hit rock bottom and fewer units as the stock prices soar. As a result, your investment averages out despite the price differential.
You gain by reinvesting your profits, thus earning higher returns. The longer your tenure, the higher your returns from compounding. However, it is prudent to begin as early as possible with the SIP to gain from the power of compounding, a vital factor to create long-term wealth. In turn, you are securing your child’s future.
SIP is a vital tool for your children’s education planning. The primary design envisages long-term investment across various asset classes to help your savings grow while your dreams take flight. Moreover, mutual fund SIP is far from complicated yet delivers exceptional returns, provided you follow a few cardinal steps. They are:
The first step is opening an account where your child, still a minor, is the sole holder. However, the patent or the legal guardian represents the child during the account’s currency until they turn 18.
The horizon depends on when you start the SIP for your children’s education. Equity mutual funds require long-term investment horizons for driving aggressive returns for a healthy corpus. However, change your stance as the child’s enrolment nears, embracing debt instruments in a conservative approach.
Your child’s educational aspirations are first and foremost, and you should assess the future cost accordingly. However, the critical point to remember is that whatever the goal, the rising cost remains constant due to several factors, including inflation.
An annual review of your portfolio helps you assess the portfolio’s performance and prompts necessary course corrections. Moreover, evaluate the portfolio performance with the benchmark and their peers. As a result, you get a realistic view of meeting your goals on schedule.
The significant factors for selecting the SIP are your time horizon, income, corpus target, and risk tolerance. After all, you would want the best for your child. It is only sensible to start with a single fund and gradually diversify to a few more, investing proportionately across the schemes.
Thus, your strategy should be to build a portfolio with small proportions in small and mid-cap funds for high returns. Then, balance them with large-cap funds for stable returns. Accordingly, the compiled indicative list represents popular SIP schemes that you can explore for making an informed choice.
|S No||Fund Name||AUM (Rs)||Expense Ratio (%)||Annual Yield (%)|
|1||ABSL Frontline Equity Fund||18897.76 Cr||1.08||14.85|
|2||Axis Long Term Equity Fund||28556.83 Cr||0.72||14.85|
|3||Parag Parikh Flexi Cap fund||8701.65 Cr||0.96||21.11|
|4||SBI Equity Hybrid Fund||38080.12 Cr||0.97||12.20|
|5||SBI Focused Equity Fund||14533.37||0.97||13.08|
|6||Axis Bluechip Fund||25134.85||0.55||NA|
|7||L&T Midcap fund||6258.04 Cr||0.77||7.25 (3 Year)|
|8||HDFC Midcap Opportunities Fund||25779.00 Cr||1.04||7.94 (3 Year)|
|9||Axis Small Cap Fund||4727.14 Cr||0.38||17.37 (3 Year)|
|10||HDFC Small Cap Fund||10024.44 Cr||0.95||5.88 (3 Year)|
|Note: AUM = Assets Under Management The minimum SIP amount ranges from Rs 100 to Rs 1,000|
Whatever be the SIP choice for your child’s education, there is no alternative to starting early. Apart from the several advantages, a long-term horizon allows the maximum returns from equity mutual funds while mitigating the market volatility risks.
Moreover, consider increasing the SIP amount annually for a healthy corpus to fund your child’s education. Finally, though SIP delivers inflation-beating returns, it is always in the child’s interest to have a financial cushion to pursue higher education of one’s choice.
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