Why to choose mutual funds for child education planning?

When it comes to investing for their child’s education, parents have a wealth of options to choose from. In India, there are several types of investments, including mutual funds, that they can leverage to build a significant education corpus. This article explains why choosing a mutual fund for child education planning may be a good idea.

The rising cost of education: why planning is essential

Inflation or price escalations affect every aspect of life, including education. According to a 2020 National Sample Survey Office report, the cost of education has nearly doubled over the previous decade, indicating the fast pace of inflation. Further, the cost of overseas studies is largely influenced by currency depreciation, adding to the financial burden. In light of these reasons, it is essential to have a robust education plan.

Creating a plan and starting to save for your child’s higher studies is just the first step. However, to counter inflation, it is essential to invest the money in instruments that deliver inflation-beating returns. While India is home to several investment options, mutual funds stand out as a compelling choice due to the many benefits they offer.

Why mutual funds are a good option for child education planning

Here are some advantages of mutual funds that make them ideal for education planning:

• Investment growth

According to major surveys, education inflation is rising at twice the rate of general inflation, reaching an astonishing rate of 11 to 12%. Traditional options, such as savings accounts or fixed deposit accounts, offer returns but not enough to beat inflation. Mutual funds, particularly, equity mutual funds are known to offer comparatively higher returns, helping you stay ahead of inflation.

• Tax benefits

Equity mutual funds are ideal for long-term goals as they need time to overcome short-term volatility and perform. Among them, Equity Linked Savings Schemes (ELSS) are particularly advantageous in terms of their tax benefits. They allow you to reduce your taxable income.

• Professional management

Mutual funds are an effective way to capitalise on the potential of equity. Investing in stocks directly requires time and expertise to identify high-quality stocks that would perform well. Moreover, it necessitates opening a separate Demat and trading account. However, with mutual funds, none of this is required. Professional fund managers handle your investments. They use their expertise to identify profitable opportunities and aim to generate high-risk-adjusted returns.

• Investment and withdrawal flexibility

Mutual funds offer greater flexibility than other investment options. You can invest in a lump sum or instalments through a Systematic Investment Plan (SIP) that allows you to invest with as little as Rs 500 per month. There is no fixed investment tenure, enabling you to benefit from long-term investments. Additionally, open-ended mutual funds allow withdrawals as needed, with no lock-in period except for ELSS. This flexibility helps you adapt to your child’s course’s financial requirements without incurring penalties.

Types of mutual fund investment for child education planning

There are different types of mutual funds to suit different financial goals, investment horizons and risk appetites. Broadly, they are categorised into three types: equity, debt and hybrid, each with a different risk-return profile.

• Equity mutual funds: Such funds invest in the stocks of companies. While they carry high risks, they offer the potential for high returns over the long run. Equity is a highly volatile asset class. Hence, equity funds are suitable for long-term goals because they need time to weather short term market fluctuations and perform well.
• Debt mutual funds: Such funds invest in fixed-income securities. Thus, they are low-risk investments. However, they also offer lower returns and are more suitable for short-term goals.
• Hybrid mutual funds: Such funds invest in a mix of equity and debt, allowing investors to balance between risk and returns. Hybrid mutual funds are suitable for medium-term goals.

Out of these three, equity and hybrid funds may be more suitable for child education planning, as they are known for capital appreciation. However, as you approach your goal, you can consider switching to debt funds to protect your capital.

Before investing your money, it is important to consider the tax implications of these funds because your gains will be subject to capital gains tax upon redemption or switching.

How to estimate the amount needed for your child’s education

Thanks to technology, you can easily estimate your investment value or determine the right amount to start an SIP for child education.

An SIP calculator helps you estimate your future investment value based on assumed return rates. On the other hand, a reverse SIP calculator allows you to know how much you need to invest to reach the target amount you have in mind.

It is important to note that these calculators are only for estimates. Mutual fund returns are neither fixed nor can be predicted. Nevertheless, these tools help you create a well-thought-out investment plan.

How to make a mutual fund investment for child education

You can start a mutual fund investment for your child either in your name or in your minor child’s name. If you choose the latter, you are likely to receive some benefits. When you invest in your child’s name, there is an emotional value attached to it. You inadvertently become more committed to the investment until you reach the goal.

Moreover, since you invest for your child’s higher education, you are more likely to redeem your investment once they turn 18. The gains will attract capital gains tax only upon redemption, increasing the likelihood of low or no taxes because of your child’s low or zero income.

Here are the steps to open a mutual fund account in your child’s name:

1. Analyse your financial goal, risk appetite, and investment horizon, and select a suitable mutual fund accordingly.
2. If you are investing for the first time, complete the Know Your Customer (KYC) process by submitting identity and address proof.
3. Open a mutual fund account in your child’s name. You must submit documents, such as a passport or birth certificate, proving the child’s age and your relationship with them.
4. Choose your mode of investment and make the payment.

Conclusion

With their wide range of schemes, mutual funds are suitable for different financial goals, including education planning. To optimise taxes, you can open an account in your child’s name.

An investor education initiative by Edelweiss Mutual Fund

All Mutual Fund Investors have to go through a one-time KYC process. Investors should deal only with Registered Mutual Fund (RMF). For more info on KYC, RMF and procedure to lodge/redress any complaints, visit - https://www.edelweissmf.com/kyc-norms  

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