Investing for education

Buy Gold Mutual Funds

Invest Mutual Funds Online

Download Tax Saving Mutual Fund Application Forms

Call 0 94 8300 8300 (India)

The arrival of a child triggers a range of emotions in a household. Chief among them perhaps is the need to provide for the child's future. Several parents, who had been happy spenders, seriously consider saving and investing. As the old dictum goes, starting early is the best thing. Most, however, are confounded with the choice of products when it comes to saving for the child's education.

As the objective is to create a corpus that can be drawn down to pay for higher education, the investment portfolio should have both equity and debt. Setting aside money in a recurring deposit is a default choice, but a fixed income-yielding investment is akin to taking a slow train. The need is not for income, but growth, in the early days of saving. Choosing a growth-oriented product, such as an equity fund, enables growth in value, serving the need for a large withdrawal in later years. There are three strategic elements. The first is the allocation of investments to equity and debt, depending primarily on the number of years of saving, before the corpus is needed. An early start would enable investing at least 65 per cent in equity. The second is protection from volatility in equity markets as the time to draw on it approaches. A periodic rebalancing strategy is needed to convert the corpus into debt, before the withdrawal is due. The third is the de-risking of the corpus from any risks to income of the parents, on whom the child is dependent.

The simple product needed is one that has equity and debt, and enables flexibility of rebalancing the proportions over time. A balance fund would serve the need quite well, and can be rebalanced through systematic withdrawals. This strategy may suffer the limitation of being tied to a single fund's performance. The same objective can be replicated by choosing an equity fund and a recurring deposit account with a bank. The deposit provides the element of stability and equity the need for growth. The equity fund can be reviewed annually to ensure it is performing well. A yearly SIP renewed after performance review should be adequate. Spreading the investment over 2-3 chosen diversified equity funds may reduce the risks of fund selection. Redemptions from an equity fund are easy to manage when the portfolio has to be rebalanced.

Happy Investing!!

We can help. Call 0 94 8300 8300 (India)

Leave your comment with mail ID and we will answer them

OR

You can write back to us at PrajnaCapital [at] Gmail [dot] Com

 

---------------------------------------------

Invest Mutual Funds Online

Transact Mutual Fund Online

Download Mutual Fund Application Forms from all AMCs

Download Mutual Fund Application Forms

Best Performing Mutual Funds

1. Largecap Funds Invest Online
1. DSP BlackRock Top 100 Fund
2. ICICI Prudential Focused Blue Chip Fund
3. Birla Sun Life Front Line Equity Fund
2. Large and Midcap Funds Invest Online

1. ICICI Prudential Dynamic Plan
2. HDFC Top 200 Fund
3. UTI Dividend Yield Fund
2. Mid and SmallCap Funds Invest Online

1. Reliance Equity Opportunities Fund
2. DSP BlackRock Small & Midcap Fund
3. Sundaram Select Midcap
4. IDFC Premier Equity Fund
3. Small and MicroCap Funds Invest Online

1. DSP BlackRock MicroCap Fund
4. Sector Funds Invest Online

1. Reliance Banking Fund
2. Reliance Banking Fund
5. Tax Saver Mutual  Funds  Invest Online
1. ICICI Prudential Tax Plan
2. HDFC Taxsaver
3. DSP BlackRock Tax Saver Fund
4. Reliance Tax Saver (ELSS) Fund
6. Gold Mutual Funds Invest Online

1. Relaince Gold Savings Fund
2. ICICI Prudential Regular Gold Savings Fund
3. HDFC Gold Fund

 

The space for children's education is crowded, given the emotional appeal. Mutual funds offer specifically named funds to encourage saving for children. These are nothing but hybrid products holding equity and debt, and not all of them do well. Choosing such hybrids may mean tying oneself to the performance of a given fund, unless there is a yearly review. Many of these hybrids underperform and need careful selection and review. There are some who buy their child an insurance policy. The investment is made over time, and a lump sum is paid in future. This might be a wasteful and low-return investment. The child does not need insurance and returns of this product may be undermined by the cost embedded.

The choice of an insurance product that invests and secures the funds for education in the unexpected eventuality of death of the parent is useful. The limitation of such combination products is the investment component might underperform. There is also the rigidity of sticking to the chosen product, without being able to shift into another if it underperforms. Insuring for a specific sum assured might turn out to be more flexible and less expensive.