Best SIP Plan for Child Education

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.

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What is a Mutual Fund?

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. 

What is SIP?

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. 

How Do SIPs Work?

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:

Month  Monthly SIP (Rs) Unit Price (Rs) Total Units
January  5000 20.00 250
February  5000 16.67 300
March  5000 15.38 325
April  5000 16.67 300
May  5000 12.50 400
June  5000 12.50 400
July  5000 10.00 500
August 5000 14.28 350
September  5000 15.15 330
October 5000 17.54 285
November 5000 20.00 250
December 5000 16.67 300
Total  60000 15.04 (Avg) 3990
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Points to Note

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. 

People also read: Best Child Plan

How Does SIP Help Plan Your Child’s Education?

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. 

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Advantages of SIP Plans

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.

  1. Inculcates Investment Discipline

    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. 

  2. Rupee Cost Averaging

    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. 

  3. Power of Compounding

    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. 

  4. Using SIP Plan for Child Education

    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:

  5. Opening a minor account portfolio

    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. 

  6. Fix your time horizon

    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. 

  7. Consider your child’s goals and aspirations

    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. 

  8. Monitoring portfolio performance

    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. 

People Also Read: Sip Calculator

How to Choose the Right SIP for Child Education?

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.

Fund Name  AUM (Rs) Expense Ratio (%) Annual Yield (%)
ABSL Frontline Equity Fund 18897.76 Cr 1.08 14.85
Axis Long Term Equity Fund 28556.83 Cr 0.72 14.85
Parag Parikh Flexi Cap fund 8701.65 Cr 0.96 21.11
SBI Equity Hybrid Fund 38080.12 Cr 0.97 12.20
SBI Focused Equity Fund 14533.37 0.97 13.08
Axis Bluechip Fund 25134.85 0.55 NA
L&T Midcap fund 6258.04 Cr 0.77 7.25 (3 Year)
HDFC Midcap Opportunities Fund 25779.00 Cr 1.04 7.94 (3 Year)
Axis Small Cap Fund 4727.14 Cr 0.38 17.37 (3 Year)
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

In Conclusion

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.

FAQ's

  • What is the meaning of expense ratio in mutual funds?

    A mutual fund’s expense ratio is an important metric that includes operating and management fees. Fund houses determine their expense ratio by dividing the combined operating and management fees by the total fund asset value. Moreover, fund houses share fund profits with the investors after adjusting the expense ratio.  
  • What does the NAV represent in mutual funds?

    The NAV or the Net Asset Value represents the market price of the units held in your investment portfolio. It is also the price at which your sell your units to the AMC when you redeem your investment partially or fully notified at the end of the business hours mandatorily. 
  • What are the four things to watch out for before starting a SIP for your child’s education?

    You should compulsorily look at the following before starting the SIP to build a corpus for your child’s education.
    • Fund structure embracing equities with the potential to deliver inflation-indexed returns
    • Long-term performance of the chosen fund 
    • The fund manager’s track record
    • Portfolio concentration across sectors and industries 
  • Do mutual fund investments provide income tax exemptions?

    You can save on income tax by investing in the ELSS of mutual funds under Section 80C of the IT Act, 1961, up to a maximum of Rs.1.5 Lac in a financial year. However, there is a lock-in of 5 years. 
  • What are the three mantras for mutual fund SIPs for your child’s education?

    The SIP has made mutual funds the ideal investment vehicle for small and big investors. The three mantras that help create wealth for your child’s education are:
    • Start early, even with a small amount
    • Invest regularly regardless of the amount
    • Invest for long-term growth
  • What is the correlation between risk and return in a mutual fund?

    Since mutual fund asset classes involve market instruments, the higher the risk, the higher the return, and vice versa.

*All savings are provided by the insurer as per the IRDAI approved insurance plan.
*Tax benefit is subject to changes in tax laws. Standard T&C Apply
^The tax benefits under Section 80C allow a deduction of up to ₹1.5 lakhs from the taxable income per year and 10(10D) tax benefits are for investments made up to ₹2.5 Lakhs/ year for policies bought after 1 Feb 2021. Tax benefits and savings are subject to changes in tax laws.
#The lumpsum benefit is calculated if policyholder invested ₹10000 monthly for 10 years in the fund with a policy term of 20 years. This Point To Point past performance data of last 10 years has been used to illustrate a scenario for the customers benefit. It is assumed that the past 10 years returns would have also been delivered in last 20 years. This is not guaranteed and not in anyway indicative of what the customer may actually get 20 years from now. The investment is subject to market risk and the risk is borne by the policyholder.
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^^The information relating to mutual funds presented in this article is for educational purpose only and is not meant for sale. Investment is subject to market risks and the risk is borne by the investor. Please consult your financial advisor before planning your investments.

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