Savings for children: It is children’s day today and we will be discussing about investing for child’s future for education, healthcare, or other critical expenses. It is essential to create different plans to segregate the savings for all critical expenses.
With the increasing costs of higher education in India, it has become crucial for parents to prioritise financial planning to ensure their children receive a quality education. Early planning allows parents to carefully allocate their funds and explore various investment options to establish a robust investment strategy.
One commonly utilised method for achieving long-term financial objectives, such as financing children’s higher education, is through Systematic Investment Plans (SIPs). SIPs offer a structured approach to investing that can help parents accumulate the required funds over time.
Plan 1: Equity and debt funds
“Mutual funds can be an excellent way to build a strong financial foundation for your child’s future as education costs rise sharply — doubling every six to seven years due to inflation ranging from 9-11%. Thus, planning early with a well diversified mutual fund portfolio can help you stay ahead. Starting with a SIP in diversified equity and debt funds allows your investments to grow steadily over time. For long-term goals, an 80:20 ratio in equity and debt funds can target a 12% return, creating a substantial corpus over 15-20 years,” explained Chethan Shenoy, Director & Head – Product & Research, Anand Rathi Wealth Limited.
Shenoy added monthly SIPs in two or three funds work. Like a Rs 10,000 monthly SIP with a 12% annual return could grow to nearly Rs 1 crore in 25 years.
“Invest across large cap, mid cap and small cap funds and also explore strategy based mutual funds like focused and contra categories which can help generate Alpha. Additionally, as the investment horizon shortens, gradually shifting funds to safer debt or liquid funds can preserve gains and provide stability. You can also consider combining investing with taking out an education loan so that the returns from the corpus you have accumulated continue to grow while you keep generating returns on the total corpus,” Shenoy added.
He further explained: “For example, an investor contributes Rs 20,000 monthly via SIPs over 15 years to build a corpus for their child’s higher education. With an 80:20 allocation in equity and debt and an expected 12.6% annual return, it builds a corpus of Rs 1.06 crore. This corpus is then deployed strategically by continuing the SIP and adding an education loan of say Rs 1.4 Cr at 9% to cover education costs, then the investor retains an additional corpus of Rs 43 Lakhs. This highlights how a disciplined and planned approach can comfortably meet financial commitments and even leave a surplus.”
Plan 2: Saving in Hybrid Funds
Hybrid funds blend equity and debt investments to achieve the scheme’s investment objectives by offering potentially higher returns with reduced risks. These funds aim to help investors meet both short-term and long-term financial goals, with the equity portion focused on generating long-term wealth and the debt component providing stability against market fluctuations.
Jiral Mehta, Senior Research Analyst, FundsIndia, shared how a strategic investment plan through mutual funds can build a robust corpus for your kid.
“Remember the 7-3-1 rule to become a successful equity investor. Here in you can invest with a time frame of at least 7 years – historically, a 7+ Year time frame helps you minimize your odds of negative returns (no occurrences in the last 25+ years) and increases your odds of better returns (>10% CAGR). Longer Time Frames allow enough time for recovery from large market falls,” Mehta explained.
She added: “Besides, prepare mentally for these 3 temporary but painful phases: Disappointment phase i.e “I expected far more…” phase – returns temporarily become 7-10%. Irritation Phase i.e “My FD would have done better…” phase – returns temporarily become 0-7% . Panic Phase i.e “My portfolio value is lower than what I invested…” phase – returns temporarily become NEGATIVE! This happens in almost every Equity SIP investor’s journey – more frequently during the initial years (read as the first 5 years). Most of us give up during these phases, especially when they sometimes extend over several months. Be patient and prepare for these 3 phases.”
Lastly increasing the SIP amount makes a lot of difference. “Increase your SIP amount every 1 year – Even a small increase every year can make a huge difference to your final portfolio value over the long run. Over a long time frame (i.e 20 years), your portfolio value DOUBLES when you increase your SIP every year by 10%,” Mehta noted.