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How to invest for Child Education Goal

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Undoubtedly your Child Education is very important Goal which ensures better education and quality career of your child.

The main difference for this Goal as compared to other goals is that the date you need to achieve this goal is Fixed.  If your plan for owning a Home or Car differs for a couple of years also you need not to panic, you can simply own them after 2 years. But You need to be prepared with required corpus amount by the time your Child turns 18.

Many Insurance /Financial companies are well aware of this fact, and emotional value of your Child’s Education goal and try and sell their products keeping fancy names. In reality, independent Mutual funds selected based on their track records will give far better results than those Child plans.

Below mentioned ULIPs, SSY, PPF may not a good choice for this goal, below are my views.

  1. ULIPs, Money Back Policies: They invest most of the money in insurance, which otherwise could have brought by you directly in Term insurance with much lesser premium. They come with minimum 5 yrs lock-in period, which will stop you from switching to other alternate plans if that ULIP delivers poor returns. Since investment is clubbed with insurance you will not be able to judge actual costs and actual returns, you get a very blurred understanding of this. These are emotional Trap.
  2. Mutual funds with Child plans: They are mostly are balanced funds and most of them have very high exit loads, returns are also not high in the past as it is mainly conservative in nature.
  3. Then there are Govt. products like PPF, Sukanya Samriddhi for Girl Child etc: Yes they give Fixed 7 to 8% returns and are absolutely safe, but they are not going to get you lot of money. It is actually a big opportunity loss if you are investing for next 10, 15, 20 years and you are locked into these schemes which gives you just 8.5%, which is just inflation adjusted, you are not earning anything. In fact, because you are compromising on the big timeline,  you may aim to get a minimum 15% elsewhere. it’s a long term goal, In between if it goes up and down it doesn’t matter while making sure it will earn you more money at the end.

Following steps can be Best options for Child Education Goal.

  • Investors must be guided by the timelines, investments that are more than 5 years you can actually take the risk. You can invest in something volatile but will earn you more return. Because you are investing for long period, if your timeline is 5+ years your risk comes down.
  • In fact, the study shows that if you invest in SIP for more than 4 years, there has been no loss. Any lesser period like 1 month, 1 year, investors lose money. So always think long term!
  • Markets are always volatile. That is why we are able to buy cheap over the long run, and over a period of time it will only go up, you will reduce the possibility of losing money
  • Many schemes with “child” added to its name are mainly emotional trap because financial literature in India is very low, people get attracted to it, but it may not be the best idea.
  • You should have your Child plan, devised by you and you should have full control over that and it doesn’t require any serious efforts, all you need to do it choose 2 to 3 good equity funds with balanced fund, Do your SIP, Make sure that you are not taking that money out for any other purposes.
  • Major Points to consider.
    • Education costs in India inflate at the far higher rate than all other items, Engineering Degree which used to cost just 3 to 4 lac just 5 years back now costs up of around 10Lac in good colleges. Hence it is important for you to invest in high return investments to meet the goal.
    • I think Equity is the only Option to match such high inflation rate of 12 to 15%. And starting early is the Key to success. It is not advisable to depend on only Equity oriented portfolio for any goal with less than 5 years time frame, because market fluctuates a lot in such a small period. Which means Ideally one must start investing in Child education by that time Child is 8-year-old, so that full 10 year period will be available to earn required corpus.
    • An early start will also make a considerable change.
    • More importantly, one must also plan and provide for just in case if you are not around, your child education plan should not suffer. For this, I suggest all parents go for Pure Term insurance. Term insurance plan premiums are very low if parents choose them at early ages. The sum of this insurance can be including your Loans, Future needs well being of your family, Marriage expenses of the child, including your Child Education expenses.

Powerful strategy

you may choose 2 to 3 good equity funds to start SIP.

  • If your time for retirement is more than 10 years, you can consider 1 Multi-cap, 1 Midcap, and 1 Small cap.
  • If you have 5 to 10 years time consider more allocation to Multi-cap/Large-cap funds only
  • If you have 3 to 5Yrs time, stick to balanced funds.
  • Less than 3 yrs, go for Fixed income only.

You can select Best funds to start in 2019 from this link.

Below are my suggestions

Category

Mutual fund

CRISL Rating

Value research rating

AUM in Cr

3Y

5Y

10Y

Large cap funds

Aditya Birla Sun Life Frontline Equity Fund

Rank #1

5 star

       20,011

11%

15%

19%

Mid cap Funds

L&T Mid cap fund

Rank #2

5 star

         3,196

9%

21%

22%

Small Cap funds

Reliance Small Cap Fund

Rank #3

5 star

         6,900

13%

29%

Multi Cap funds

Kotak Standard Multicap Fund

Rank #2

4 star

       20,100

13%

19%

Balanced Fund

HDFC Hybrid Equity Fund

Rank #3

4 star

       21,230

10%

17%

20%

 

Friends, please provide your view in the comments below.

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2 Comments

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  1. Hi

    Do you have any funds suggestions for 2020? Thanks appreciate this post of yours

    1. Thanks Leo. These funds are doing well even now. However, I will post new list soon!

      Happy Investing.

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