For an average Indian household, children’s education continues to be one of the biggest expenses. Education costs are constantly rising and planning for this outflow is very important.
Lifestyle inflation also affects the cost of your child’s education. As living standards become higher, parents want to send their children to the best institutions. Furthermore, children grow up in a certain atmosphere and do not want to attend government institutes that do not offer the latest and best technologies.
In this situation, financial planning is crucial to ensure your child’s education is not compromised. You may be able to build the required corpus if you start early to meet your financial goal of sending your child to an Ivy League college.
Several investment instruments such as fixed-income securities, equities, insurance plans, and other products are available. Every instrument has certain risks; higher the risk, higher is the return. Generally, fixed-income securities like fixed deposits (FDs) deliver guaranteed returns, but these are low. On the other hand, equities may deliver higher returns, but are amongst the riskiest investment products. Investing in mutual funds may overcome the limitations of fixed-income securities while reducing the risk of direct equity investing.
Here is how you may use MFs to fund your child’s higher education.
- Determine your goal before investing
Before you invest in any instrument, it is important to determine the financial goal, which in this case is your child’s education. You must plan for the costs after taking into consideration the rate of inflation to determine the amount you will need to fund your child’s education. You may then evaluate the different mutual fund schemes that match your investment objectives.
- Start early
It is very important that you start early to ensure you are able to accumulate the corpus required to fund your child's higher education. When your child is young, you may not plan for his higher education, considering you have several years before the money is required. However, when you start early, you are able to assume higher risks that give you the opportunity to earn greater returns and build a larger corpus. Here are two reasons why investing in mutual funds early is beneficial.
- Benefit from the power of compounding
The compounding effect means that your earnings on the capital investment offer additional returns. These returns are reinvested to enable you to grow your wealth. Over the long-term, the power of compounding helps you build a larger corpus, which will help you pay for your child’s education.
- Invest a smaller amount
When your child is young, you have several years to accumulate the funds required for his higher education. This means you may invest a smaller amount, which will not create any financial burden. However, if you delay your investments, you will need to invest a larger amount to accumulate the required corpus.
- Invest through Systematic Investment Plans (SIPs)
When you want to invest in mutual funds, an SIP is the most popular route. When you invest through an SIP, you invest a fixed amount on a particular date in your chosen funds. An SIP is an excellent way to achieve rupee cost averaging, which reduces the effective cost of your investment. When the net asset value (NAV) is higher, you accumulate lesser units. In comparison, if the NAV is lower, you are able to acquire more units. Therefore, the average cost of the total units reduces due to the price fluctuations. Also, with an SIP, you are able to choose an amount that does not cause financial distress. Furthermore, you may increase or decrease the amount as per your situation. You may also start or discontinue the SIP without any limitations.
Alternatively, you may choose a Systematic Transfer Plan (STP). Under this route, you invest a lump sum and then transfer a fixed amount into different schemes at periodic intervals. The lump sum may be in a short-term debt fund, which has lower investment risks.
To ensure you have the corpus required for your child’s education, you need to invest in the right types of schemes. This requires research and analysis, which is tedious and time-consuming. Moreover, it requires some basic level of expertise.
If you do not have the skills and time to do an in-depth research, you may download ARQ. It is an automated investment engine offered by Angel Wealth. ARQ uses advanced methods to match the most appropriate schemes to your financial objectives and risk profile. The entire procedure is automated, ensuring there is no human intervention or bias.