Invest Wisely For Your Child's Education In India

The cost of education in India is rising, and it is becoming increasingly important for parents to start saving early for their children's future. The cost of a four-year engineering degree, for example, is expected to double in the next six years. With education being one of the biggest expenses for Indian families, it is important to plan ahead and make the right investment choices.

There are several investment options available for parents in India, including mutual funds, savings schemes, term deposits, and insurance plans. Mutual funds can be categorised into equity, debt, and hybrid funds, each offering different levels of risk and return. Solution-oriented mutual funds, for instance, provide a balance between returns and risk by investing in both equity and debt instruments. Government-backed savings schemes, such as the Sukanya Samriddhi Yojana, are also a popular option for parents, offering low risk and tax benefits. Term deposits, such as fixed or recurring deposits, are another traditional option, although they may not offer returns that beat inflation.

When planning for their child's education, parents should consider their investment objectives, including their risk appetite, investment horizon, investment amount, and target corpus. By starting early and choosing the right investment options, parents can ensure they have sufficient funds to support their child's educational goals.

Start early and save regularly

Starting early and saving regularly for your child's education is one of the most important steps you can take as a parent. Here are some detailed tips to help you get started:

Start as Early as Possible:

The power of compounding works in your favour when you start saving early. The earlier you begin, the more time your savings have to grow, and the larger the corpus you can accumulate. For example, starting to save when your child is just born or a few years old can help you build a significant amount by the time they are ready for higher education.

Set Clear Investment Objectives:

Before you begin investing, it's crucial to define your investment goals and understand your risk appetite, investment horizon, investment amount, and target corpus. These factors will guide your investment strategy and help you choose the most suitable options.

Explore Different Investment Options:

There are various investment avenues available, such as mutual funds (equity, debt, and hybrid funds), solution-oriented mutual fund schemes, savings schemes (like Sukanya Samriddhi Yojana), term deposits (fixed or recurring deposits), gold ETFs, and public provident funds (PPF). Each option has its own risk profile, returns, and liquidity features, so be sure to research and understand them before making a decision.

Mutual Funds for Long-Term Goals:

If you have a long-term investment horizon (at least 5-15 years), consider investing in mutual funds, particularly equity-oriented schemes. These funds typically demand a longer investment horizon and can deliver high returns over time. You can create a diversified portfolio that includes large-cap equity funds, solution-oriented hybrid funds, and diversified schemes to balance risk and returns.

Systematic Investment Plans (SIPs):

SIPs are a flexible way to invest in mutual funds, allowing you to start with a small amount and invest at regular intervals. This helps you get comfortable with investing and build your savings over time. You can also benefit from rupee-cost averaging, which smooths out market volatility.

Government-Backed Savings Schemes:

Consider government-backed savings schemes like Sukanya Samriddhi Yojana (SSY), especially if you have a girl child. SSY offers tax benefits under Section 80C of the Income Tax Act and provides a fixed return that is often higher than other government schemes. It's a low-risk option with a long-term horizon of 21 years or until your girl child marries after the age of 18.

PPF for Tax-Free Returns:

PPF accounts offer reasonable returns, tax benefits, and tax-free maturity amounts. You can open a PPF account in your child's name, and the funds can be used for their education or other needs. The account has a 15-year maturity period, and you can withdraw funds before maturity for education-related expenses.

Gold ETFs for Diversification:

Investing in gold ETFs (Exchange-Traded Funds) offers a convenient and pure way to invest in gold. Gold is often seen as a stable investment, and gold ETFs are traded on the stock exchange, making them easy to buy and sell. They are a good way to diversify your portfolio beyond traditional stocks and bonds.

Regularly Review and Rebalance:

Remember to review your investment portfolio at least once a year. Check if the amount required for your goal has changed and if your portfolio is on track to meet that goal. Rebalance your portfolio annually to ensure it aligns with your risk appetite and investment objectives.

Starting early and saving regularly gives your investments time to grow and compound, helping you build a substantial corpus for your child's education. It also ensures that you don't have to dip into your retirement savings or take on excessive debt to fund your child's future.

Choose the right investment option

When it comes to choosing the right investment option for your child's education, there are several factors to consider. Here are some key points to keep in mind:

• Risk appetite: Determine how much risk you are comfortable with. Equity-oriented investments, such as mutual funds, typically carry higher risk but offer potential for higher returns. Debt-oriented investments, like debt mutual funds or fixed deposits, are considered less risky but may provide lower returns.
• Investment horizon: Consider how long you are willing to lock in your funds. For longer investment horizons, equity-oriented investments are generally recommended, while debt-oriented investments are suitable for shorter horizons.
• Investment amount: Decide how much you can invest. You can choose to invest a lump sum amount or through Systematic Investment Plans (SIPs), which allow you to invest smaller amounts at regular intervals.
• Target corpus: Estimate the amount you need to accumulate for your child's education. This will help you determine the principal amount and expected returns.
• Investment options: Explore different investment options such as mutual funds (equity, debt, or hybrid), solution-oriented mutual funds, savings schemes (e.g., Sukanya Samriddhi Yojana for a girl child), term deposits (fixed or recurring deposits), gold (physical or Gold Exchange-Traded Funds), or Public Provident Fund (PPF).
• Diversification: Diversify your investments across different asset classes to balance risk and return. For example, you can invest in a combination of equity and debt funds or choose hybrid funds that provide exposure to both.
• Volatility and liquidity: Be mindful of market volatility, especially as you get closer to redeeming your investments. Consider moving your investments to less volatile options like liquid funds to ensure liquidity when needed.
• Tax implications: Consider the tax benefits and implications of different investment options. For example, investments in certain savings schemes and PPF may offer tax deductions or exemptions under Section 80C of the Income Tax Act.
• Expert advice: Consult a financial advisor or investment professional to help you navigate the various investment options and make informed decisions based on your specific goals and risk appetite.

Opt for a child investment plan

Opting for a child investment plan is a great way to secure your child's future and ensure their financial stability. Here are some key points to consider when choosing a child investment plan:

• Start Early: The earlier you start investing, the more time your money has to grow. Starting early allows you to take advantage of compounding returns and build a substantial corpus for your child's future. It's important to begin investing as soon as possible, even if your child is very young.
• Diversify Your Investments: Don't put all your eggs in one basket. Diversify your investments across different asset classes such as equity, debt, mutual funds, stocks, etc. This helps reduce risk and maximize returns. Consider investing in a mix of large-cap and mid-cap stocks or funds if you have a higher risk appetite.
• Choose the Right Plan: There are various child investment plans available, such as mutual funds, equity-linked savings schemes, public provident funds, and insurance plans. Evaluate the different options based on their returns, risk level, lock-in periods, and tax benefits. Consider seeking advice from a financial advisor to choose a plan that aligns with your goals and risk tolerance.
• Flexibility: Look for child investment plans that offer flexibility in terms of premium payment options, withdrawal options, and policy terms. This will allow you to customize the plan according to your financial situation and goals.
• Tax Benefits: Opt for investment plans that offer tax benefits under Section 80C and Section 10(10D) of the Income Tax Act. This can help you save money and reduce your tax liability.
• Performance and Reviews: When choosing a child investment plan, consider the past performance of the fund or scheme. Review the fund's portfolio and the types of stocks or assets they invest in. Conduct regular reviews of your chosen plan to ensure it is meeting your expectations and making adequate progress towards your financial goals.
• Reputable Providers: Choose child investment plans offered by reputable financial institutions or insurance providers. Look for companies with a good track record, stable financial standing, and positive customer reviews.
• Goal-Based Planning: Define your financial goals and create a plan that aligns with those goals. Consider using a child investment plan calculator to estimate the required monthly investments and one-time investments based on your chosen investment options.
• Protection and Security: Opt for plans that offer protection against unforeseen circumstances, such as the death of a parent. Look for plans that provide a lump-sum payout and waive future premiums in such cases, ensuring that your child's future remains secure.
• Withdrawal Options: Consider plans that offer the flexibility to withdraw funds when needed. This can be helpful if unexpected expenses arise or if you want to access a portion of your funds while the rest continues to grow.

Remember to do your research and compare different child investment plans before making a decision. It's important to understand the terms, conditions, and potential risks associated with each plan. By opting for a child investment plan, you can take a proactive approach to securing your child's future and giving them a strong financial foundation.

Diversify your portfolio

Diversifying your portfolio is a crucial aspect of investing for your child's education. Here are some strategies to achieve diversification:

Asset Allocation

Allocate your investments across different asset classes such as equities, debt instruments, and hybrid funds. Equities, including stocks and equity mutual funds, offer higher potential returns but come with higher risk. Debt instruments, such as bonds, fixed deposits, and debt mutual funds, provide lower returns but are generally considered safer. Hybrid funds combine equities and debt, offering a balance between risk and return.

Sector and Industry Diversification

Within your equity investments, ensure you diversify across different sectors and industries. For example, invest in a range of sectors such as technology, healthcare, financials, and consumer goods. This helps reduce the impact of sector-specific risks and ensures your portfolio is exposed to different areas of the economy.

Geographic Diversification

Consider investing in international markets, particularly if you are planning for your child's education abroad. Diversifying across geographies can provide exposure to different economies and currencies, potentially reducing the impact of country-specific risks.

Fund Diversification

When investing in mutual funds, spread your investments across multiple funds to lower the risk associated with any single fund or fund manager. Diversification across funds can be achieved by investing in mutual fund categories such as large-cap, mid-cap, and small-cap funds, as well as sector-specific funds.

Regular Review and Rebalancing

Periodically review your portfolio to ensure it remains aligned with your investment goals and risk tolerance. Over time, the performance of different investments can cause your portfolio to deviate from your desired allocation. Therefore, it's important to rebalance your portfolio by buying or selling assets to return it to your target allocation.

Remember, diversification does not guarantee profits or protect against losses, but it can help reduce the overall risk of your portfolio. It's important to carefully consider your investment objectives, risk appetite, and time horizon when constructing a diversified portfolio.

Review your portfolio annually

It is important to review your investment portfolio annually to ensure that it aligns with your financial goals. Here are some key considerations when reviewing your portfolio for your child's education in India:

• Inflation Rate: The education inflation rate in India has been high, and it is essential to factor this into your investment plans. The cost of higher education is rising at a rate of 10-12% per year, so your investments should aim to outpace this inflation rate.
• Tuition Fees and Cost of Living: The two main components of the education goal are tuition fees and the cost of living. Monitor these expenses annually to ensure that your investment portfolio is on track to meet the expected costs.
• Investment Performance: Review the performance of the funds in your portfolio annually. If a fund is underperforming, consider stopping your Systematic Investment Plan (SIP) contributions to that fund and starting contributions to a better-performing fund. However, understand the reason for a fund's underperformance before making any decisions.
• Rebalancing: At the end of each year, rebalance your portfolio to maintain the desired asset allocation. For example, if your original allocation was 75% equities and 25% debt, a strong year for equities might lead to an increased weightage of equities in your portfolio. To rebalance, sell some equity stocks and invest the proceeds in underperforming assets or debt instruments.
• Step-up your Investments: Consider increasing your investment amount annually, especially if you receive salary increments. This will help you stay on track with your financial goals and account for any unexpected expenses or changes in the inflation rate.

Frequently asked questions