Your children have a better opportunity to seek higher education in several foreign and domestic universities. Parents must start saving for their children’s education early to ensure they have the required corpus to meet the expenses. However, saving for your children’s education must not mean ignoring other goals, such as your retirement.
You must differentiate between short-term and long-term goals. An important long-term goal is retirement and you must never compromise on saving for it. This is because any shortfall towards paying for your children’s education may be funded through a loan. However, any shortfall in your retirement corpus is not compensated through any other financial facility.
Although education loans are now easily available, it is important you reduce the borrowed amount as much as possible. Here is how you may use mutual funds to meet the education expenses of your children.
- Systematic goal-based investing
Before you start investing, it is important to know how much you need to accumulate. This will depend on the course, college, and the country where your children want to pursue their education. Additionally, you must account for the rate of inflation, which is constantly increasing the cost of higher education. Once you determine the amount you need to accumulate, you may evaluate different investment options.
- Choose the right investment
You may depend on money-back insurance policies to achieve your financial goal. However, the returns on such insurance plans are low and often may not be sufficient to meet even the inflationary increase. You may invest in real estate because property prices rise over the years. However, one disadvantage of such investment is that real estate is not very liquid. You may not be able to sell the property in case you need the money instantly. Alternatively, you may have to sell it at a lower price because of your fund requirement. Therefore, mutual fund investment is recommended to enable you to build wealth over the long-term.
- Timed-based investing
Every investment must be attached to a particular goal. Furthermore, you must invest in the right product, based on the investment horizon. When you evaluate the different investment instruments, you need to ensure the returns exceed the education inflation rate. If your financial goal is set two or three years away, fixed-income securities are recommended. In case the goal is four to seven years later, you may invest in equities. If you need the corpus after ten years or more, you may invest in equity mutual funds because you may assume higher risk to accumulate a larger corpus.
When you invest for your child’s education, you must build a separate investment portfolio. Moreover, if you have more than one child, you must invest separately for all of them. Additionally, education expense funds must be classified as short, medium, and long-term to make the right investment decisions.
Even after planning and investing early, you may still fall short of the entire amount. In this case, you may apply for an education loan. Most financial institutions including banks and non-banking financial companies (NBFCs) offer such loans. When you avail of an education loan, you may take advantage of the tax benefits available under Section 80E of the Income Tax (IT) Act. Moreover, you are able to teach your children financial discipline and responsibility right from the start of their careers as they repay the borrowed amount.
Nonetheless, you need to be careful when you go for an education loan. The borrowed amount must not be very high because it may become difficult to repay it in a timely manner. It is also recommended that if possible, repay the loan before its tenure to save the interest outflow.
You may be able to avoid an education loan by investing in mutual funds for funding your children’s higher education. However, you need to choose the right funds to maximize the benefits. This requires basic knowledge and in-depth research and analysis.
In case you do not have the required knowledge, you may take help of ARQ, the robo-advisor investment engine offered by Angel Wealth. This investment engine uses technically-advanced methods to compare and evaluate different types of available schemes. ARQ then matches the most suitable plans to your lifestyle, financial objectives, and risk profile. Customized recommendations, free of human bias, are sent to your smartphone to enable you to invest at anytime from anywhere. The investment engine also monitors the performance of your portfolio to provide recommendations on any modifications that may be needed.