The growing popularity of mutual funds can be chiefly attributed to their ability to help us accomplish our financial goals, which require meticulous planning. And when it comes to securing the future of your children, there is no alternative to education. But the cost of education and overall childcare has been skyrocketing. ”How to plan for child education” is a million-dollar question parents ask nowadays.
Infosys founder, Mr. Narayana Murthy, once said that during his college days, the cost of education was about Rs 300 per year, which has now shot up to Rs 90,000 per year. This translates to 11% p.a. inflation for the last 50-55 years. So clearly, a child’s education needs to be planned well in advance.
Many of you might be wondering whether you need to invest in children education plans offered by insurance companies or can rely on a dedicated mutual fund for child education.
First things first: only the earning members of the family need to buy insurance coverage for themselves. By this virtue, your children technically don’t require any insurance. And basic financial planning principles suggest that it’s better to keep insurance and investments separate.
Where do children’s funds fit in then? Let’s understand this in detail.
Children’s funds, child education plans or a mutual fund for child education, are open-ended, solution-oriented mutual fund schemes designed specifically for children’s welfare. Their indicative asset allocation resembles that of the hybrid funds. Depending on your preferences and risk appetite, you select an equity-oriented fund or a debt-oriented fund. Many of them have a mandatory lock-in period of 5 years or till the child attains the age of majority, whichever is earlier. You need to take this into account before investing on a case-by-case basis. It’s noteworthy that by encouraging the habit of investing for children-specific goals, mutual funds may prefer to impose an exit load.
From a taxation point of view, your investments in children’s mutual funds can help you avail up to Rs 1.5 lakh of deduction u/s 80C. Taxation on capital gains is the same as that for hybrid funds, depending on their equity and non-equity exposure.
|HDFC Children's Gift Fund
|UTI CCF - Savings Plan
|SBI Magnum Children's Benefit Fund-Investment Plan-Reg(G)
|ICICI Pru Child Care Fund-Gift Plan
|UTI CCF- Investment Plan(G)
|Aditya Birla SL Bal Bhavishya Yojna-Reg(G)
|Axis Children's Gift Fund-Compulsory Lock in-Reg(G)
|Tata Young Citizen Fund
|SBI Magnum Children's Benefit Fund-Savings Plan
|LIC MF Children's Gift Fund(G)
While it is true that solution-based mutual funds such as children’s funds help you plan your specific life goals more systematically, investing in them is optional. A combination of a diversified equity fund and a hybrid fund may also prove as effective as a children’s fund. The deciding factor in providing your children with a better future is how early you start planning for this goal.
Ideally, when a child is born, you should start planning for her/his high school and when she/he starts attending pre-school, you should start investing for her/his post-graduation.
Let’s take an example now. A bachelor’s degree that costs Rs 4 lakhs today may require slightly over Rs 19 lakhs after 15 years, assuming the rate of inflation of 11% p.a. And it’s always better to build savings than rely on education loans. For this, you just need to start an SIP of Rs 4,000, assuming a moderate rate of return of 12%. If you delay this planning by 5 years, the amount you need to invest per month will double from Rs 4,000 to Rs 8,000—so start early.
The cost of education is rising fast, and it takes years of planning to educate children well. You may invest in child education plans or consider a plain vanilla mutual fund for child education. But the key really is to start early and invest regularly.
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