Investment Options for Child’s Higher Education

With the cost of education going up day by day, it has become extremely important to start saving at the earliest in order to lessen your financial burden at a later date. Funding your child’s higher education is definitely going to cost you a fortune, 10 years down the line. Hence, it is better you start investing now than regretting later.

Before you begin, you must be clear with your investment objectives. Question yourself on the following to arrive at appropriate financial goals-

• Risk appetite– how much risk can you afford with your investments
• Investment horizon– for how long can you lock-in your funds
• Investment amount– how much amount can you put in a mutual fund (whether you are planning to invest in SIPs or through lump sum amount)
• Mode of investment– whether you can invest all the amount in one go (which would lead to investing in lump sum for a year) or you wish to put in a little amount at fixed intervals (through SIPs)
• Target corpus– how much amount do you expect to receive at the end of your investment period (make rough estimates of how much returns do you wish to generate and then decide on the principal amount)

Once you have set your investment objective and have a financial plan by your side, it is time that you explore the investment options available. You can invest in the following to gather a sufficient corpus for your child’s higher education-

Mutual fund Investments for Child’s Higher Education

Mutual funds can be broadly categorized into-

• Equity– These funds invest a major portion of their assets in equity and equity-related securities of an organization. Equity mutual funds are suitable for investors with lower risk appetite and a longer investment horizon.
• Debt- These funds invest a major portion of their assets in debt and money market instruments of an organization. Debt mutual funds are suitable for investors looking to generate high returns with a moderately high level of risk involvement.
• Hybrid- Hybrid mutual funds, as the name suggests, are a combination of both equity and debt funds. These funds can either be dominated by equity investments or by debt investments. Hybrid mutual funds are suitable for investors with a high risk appetite at the cost of gaining from high returns.

For example- Let’s assume that you have a one-year-old child at present and depending upon your investment objective, it is likely that you would have an investment horizon around 10 to 15 years. Hence, you may choose to invest in equity-oriented schemes that demand a longer investment horizon for the funds to perform and deliver high returns in the long term. Basis their assets under management, you may choose to build yourself a portfolio that includes the following funds-

(Data as on 19 May 2020; Source: Value Research)

Once you build a portfolio of such equity-oriented funds, you may stay invested in them for a long time. However, when you reach a stage, let’s say after 8 years of making such an investment, you may move your investments to liquid funds in order to avoid high volatility and ensure liquidity depending upon your needs in the coming future.

Suggested Read: Why you should choose the right Mutual Fund for your Child’s Higher Education

Solution-oriented Mutual Fund Schemes

Apart from the ones mentioned above, you may also choose to invest in solution-oriented mutual fund schemes that might make the process of creating a portfolio simple for you. Here’s why you should consider these schemes-

• Solution-oriented schemes are equity or debt-oriented hybrid funds that can provide you with a balance between returns and risk
• These solution-oriented funds invest in both equity and equity derivatives along with debt and money market instruments to maintain a balance between returns offered and risk involved
• You no longer have to worry about investing in multiple assets like equity or debt as the fund manager does it on your behalf
• For best results, you should consider staying invested in these schemes well beyond the 5 year lock-in period, especially in case of equity-oriented hybrid investments

Here are a few solution-oriented mutual fund schemes that you may consider depending upon their assets under management-

(Data as on 19 May 2020; Source: Value Research)

Savings Schemes for Child’s Higher Education

Multiple government-oriented savings schemes also help investors in gathering sufficient corpus for their children’s education. Sukanya Samriddhi Yojana is one of those government-backed savings schemes that work out well for conservative investors seeking to fund their girl child’s education.

• SSY is a low risk investment option offering tax saving benefits of up to Rs. 1.5 Lakh under Section 80C of the Income Tax Act
• However, you are only eligible to invest in the scheme if you have a girl child. Additionally, only a maximum of 2 accounts can be opened for one family under this scheme
• SSY offers a fixed return of 8.5% (as of Q4 FY 19-20), which is higher than almost any other government-backed investment schemes
• The withdrawal under this scheme is limited to only 50% of the account balance, if the child is less than 21 years of age
• It must be noted that the account matures completely when the girl child is 21 years old or when she gets married after 18 years of age

Term Deposits for Child’s Higher Education

Term deposits such as fixed or recurring deposits have long been preferred by a large group of Indian investors because of the negligible level of risk involved in them. However, these deposits fail to beat inflation and offer a good level of return on the funds invested.

• Term deposits are potentially low risk investment options but have relatively low returns on offer (6.5% to 7.5% for major banks)
• These deposits are made for a fixed period of time and offer low levels of liquidity
• Additionally, in case of premature withdrawals, banks apply penalties on the investors
• The interest earned on such investments, in excess of Rs. 10,000 annually is subject to taxation

Gold ETF

Irrespective of the investment options available, Indians tend to have the most faith in investments in gold. However, investing in physical gold comes with more risk in terms of purity and brings along additional expenses such as the making charges of jewellery, etc. Additionally, the handling of physical gold involves a lot of trouble and expenses for buying lockers, etc. As an alternate, Gold Exchange Traded Funds offer as high as 99.5% purity, and can be purchased in dematerialized form. Just like stocks, Gold ETFs are traded on the National Stock Exchange of India and can be easily traded at the applicable market prices.  Investing only in gold bullions, these funds are passive instruments whose value is linked to the price of gold in global/local markets.

Public Provident Fund

Widely known as an investment option for promoting small savings and investments amongst the people, a PPF account offers reasonable returns on investment and multiple tax benefits on the investments made. Individuals who already have a PPF account can also open another account in the name of their minor child.

• This account will be handled by the parent only until the minor turns the age of 18
• Once the child becomes an adult, the parent shall transfer the account under his name by submitting a document
• The parents can withdraw the PPF account balance before its maturity for various purposes such as the child’s education, his/her wedding, medical emergency, etc.
• However, it must be noted that while multiple PPF accounts are being handled by a family member, the total joint contribution by the whole family should not exceed Rs.1.5lakh in a financial year
• If this happens, the amount over and above Rs.1.5 will not be liable for any interest payments
• Additionally, investments in PPF account in the name of a minor are eligible for tax deductions under Section 80C of the Income Tax Act if the deposits are being made by the depositor’s income upon furnishing of required documents

Difference between various Investment Options for Child’s Higher Education

The facts and figures are subject to periodic change

Things to Consider

If you start planning early for your child’s education, plain vanilla equity mutual funds such as diversified schemes and large cap funds can be the ideal option. The following are some key factors to keep in mind when choosing a portfolio of mutual funds for your child’s higher education-

• Carefully consider how long you plan to stay invested. At the very least, you need to stay invested in equity funds for 5 years in order to let the funds perform
• Choosing equity schemes with potentially less volatility such as a large cap or diversified schemes and hybrid schemes instead of a small cap fund might be a good idea. Even though small cap schemes have superior outperformance potential, they are also prone to a higher degree of volatility as compared to large cap or diversified schemes
• Mutual fund investments can be made flexibly either through Systematic Investment Plan (SIP) or by means of lump sum investments
• When you are close to the time you need to redeem your investment i.e. at the time of funding your child’s higher education, it might be a good idea to redeem your equity investments systematically through what is called a Systematic Withdrawal Plan (SWP)

FAQs

Ques: Which is the best mutual fund to invest for higher child education?

Ans: Considering the investment horizon of a long term (minimum 5 years) for your child’s higher education, it is advised that you invest in large cap equity funds. Axis Bluechip Fund, Parag Parikh Long Term Equity Fund are a few of the given category that you may consider investing in.

Ques: I am blessed with a baby girl. What is the best mutual fund investment I can start now for her education after 20 years?

Ans: In order to invest for your girl child’s education, with an investment horizon of 20 years, you may choose to create a diversified portfolio with investments in large cap equity funds, Solution Oriented Mutual Fund schemes, and Saving Schemes such as Sukanya Samridhi Yojana.