Mutual Funds: Can small SIPs help you save enough for children’s education?
Investing in children's future requires careful financial planning. Options like mutual funds and SIPs can help accumulate funds for higher education expenses. Start early, diversify investments, and utilize compound growth for long-term benefits.
The expenses of higher education in India are consistently increasing, emphasizing the importance of financial planning for parents aiming to provide their children with quality education. Many parents underestimate the value of early planning. Beginning early enables you to harness the benefits of compound interest, substantially increasing your investment in your child’s education. Early planning in terms of where to allocate your funds for your child’s future gives you more time to consider different investment avenues and develop a solid financial strategy.
Also Read: Building wealth together: A guide to joint investment accounts for kids
Benefiting from the compounding effect
When saving for your child’s education, the impact of compound interest is significant. Initiating early and utilizing the benefits of compound interest can help you to grow your money. Compound interest enables your money to multiply exponentially over time. Each year, the accrued interest is not just added to the principal amount but also earns additional interest in the following years. This compounding effect substantially boosts your investment in the long run.
Furthermore, choosing to invest at an early stage provides you with ample time to investigate different investment opportunities and establish a solid financial strategy. Parents can consider various investment options such as mutual funds, unit-linked insurance plans (ULIPs), Sukanya Samriddhi Yojana (for girl child), or Public Provident Fund (PPF), among others.
Also Read: Income Tax: Invest before March 31 in these tax saving instruments to avail exemption
Gaining from investing in PPF
When considering investments for their children, many parents often lean towards being overly cautious about how and where to allocate their funds, leading them to opt for PPF investments. Consistently investing over a period of 15 years or longer can enable parents to accumulate a significant sum to fund their children’s higher education. This can be understood with the help of the following example.
Monthly investment: ₹12,500
Return rate: 7.1%
Investment tenure: 15 years
Invested amount: ₹22,50,000
Estimated returns: ₹17,70,301
Maturity amount: ₹40,20,301
However, many parents show a willingness to extend the investment for around five years or more to be able to pay for their wards’ higher education goals. Continuing the PPF investment for five more years means
Monthly investment: ₹12,500
Return rate: 7.1%
Investment tenure: 20 years
Invested amount: ₹30,00,000
Estimated returns: ₹36,30,221
Maturity amount: ₹66,30,221
Putting money in SSY
If you have a daughter, investing in the Sukanya Samriddhi Yojana (SSY) can greatly help in accumulating the necessary funds. This scheme is one of the national savings schemes provided by the Indian Government and is specifically designed to secure the future of a girl child.
You can open an SSY account at any public or private sector bank branch or at a post office authorized to manage the scheme. A minimum annual deposit of ₹250 is required, with a maximum annual deposit limit of ₹1.5 lakh. The account reaches maturity 21 years from its opening date. Deposits made to an SSY account are eligible for deductions under Section 80C of the Income Tax Act. Moreover, the interest accrued and the maturity amount are both tax-exempt.
Assuming that you invest in this scheme when your child turns six months old and are willing to continue investing money in this scheme for the entire tenure, your investment would amount to something like
Monthly investment: ₹12,500
Return rate: 8.2%
Investment tenure: 21 years
Invested amount: ₹31,50,000
Estimated returns: ₹52,54,046
Maturity amount: ₹84,04,046
SSY offers a secure and reliable method to save for a girl’s future needs, such as education or marriage. What’s more, it provides a higher interest rate compared to many conventional savings schemes.
Opting for mutual funds
Mutual funds can be a potent instrument for wealth generation in India. However, it’s crucial to grasp their functioning before investing. This is especially important when you’re investing for your children’s higher education goals, which are essential not to overlook.
Initially, investing in a mutual fund allows you to diversify your assets, spreading the risk and minimizing the impact of volatility on any individual investment. You have the option to select from large-cap funds, mid-cap funds, small-cap funds, or others. Additionally, you can choose to invest in children’s funds specifically designed for saving and investing for children’s future needs. However, it’s worth noting that children’s funds typically allocate a portion of the invested amount to debt, which can somewhat reduce the rate of return compared to other types of equity funds.
The table below demonstrates how investing in any of these funds can enable you to accumulate sufficient funds to cover your children’s higher education expenses, whether it be for college, university, or beyond. Assuming that the money would be invested for 21 years.
Name of the fund | Monthly investment (in Rs) | Return rate (in %) | Invested amount (in Rs) | Estimated returns (in Rs) | Maturity amount (in Rs) |
Nippon India Large Cap Fund | 12,500 | 18.28 | 31,50,000 | 3,36,24,895 | 3,67,74,895 |
Baroda BNP Paribas Large Cap Fund | 12,500 | 17.49 | 31,50,000 | 2,93,37,337 | 3,24,87,337 |
ICICI Prudential Bluechip Fund | 12,500 | 17.20 | 31,50,000 | 2,79,01,318 | 3,10,51,318 |
Motilal Oswal Midcap Fund | 12,500 | 23.54 | 31,50,000 | 8,30,61,729 | 8,62,11,729 |
Tata Mid Cap Growth Fund | 12,500 | 22.06 | 31,50,000 | 6,43,97,750 | 6,75,47,750 |
HSBC Mid Cap Fund | 12,500 | 21.85 | 31,50,000 | 6,21,15,693 | 6,52,65,693 |
Mirae Asset Large & Midcap Fund | 12,500 | 23.82 | 31,50,000 | 8,71,64,218 | 9,03,14,218 |
Quant Large and Mid Cap Fund | 12,500 | 23.61 | 31,50,000 | 8,40,68,707 | 8,72,18,707 |
Canara Robeco Emerging Equities Fund | 12,500 | 22.71 | 31,50,000 | 7,20,09,485 | 7,51,59,485 |
SBI Small Cap Fund | 12,500 | 27.24 | 31,50,000 | 15,74,22,962 | 16,05,72,962 |
Axis Small Cap Fund | 12,500 | 24.50 | 31,50,000 | 9,80,00,852 | 10,11,50,852 |
Kotak Small Cap Fund | 12,500 | 23.58 | 31,50,000 | 8,36,35,644 | 8,67,85,644 |
Franklin India Smaller Companies Fund | 12,500 | 22.78 | 31,50,000 | 7,28,81,427 | 7,60,31,427 |
HDFC Children’s Gift Fund | 12,500 | 16.58 | 31,50,000 | 2,50,56,167 | 2,82,06,167 |
Tata Young Citizens Fund | 12,500 | 14.06 | 31,50,000 | 1,60,94,624 | 1,92,44,624 |
| Source: AMFI (As of March 25, 2024) | |||||
Investing in small amounts
Systematic Investment Plans (SIPs) are an excellent tool for reaching long-term financial goals, such as funding your child’s higher education. Here’s a detailed explanation of why SIPs are particularly well-suited for this objective:
Ideal for consistent savings: Putting money through SIPs enables you to invest a predetermined amount at regular intervals, such as monthly or quarterly, directly from your earnings. This disciplined approach to saving is essential for building a substantial fund over time.
Start with a modest amount and expand over time: You can initiate SIPs with a modest sum that aligns with your current budget. As your income increases, it’s straightforward to boost the SIP amount to amass a larger fund.
Benefit from compound growth: Beginning your SIPs early harnesses the power of compounding. Your investments not only grow based on the initial sum but also on the accrued interest, resulting in a significant fund in the long term.
Invest with a single-minded focus
Maintaining a dedicated SIP account or fund for your child’s education is a prudent approach. This ensures that the saved funds are exclusively allocated to this goal, preventing them from being used for other purposes. Certainly, you can invest in SIPs through mutual funds in the name of your minor child. Here’s what you need to know:
Minor as the account holder: The mutual fund units will be legally owned by your child.
Guardian as the account operator: Until your child attains the age of 18, which is the legal age of majority in India, you can manage the account as the guardian.
KYC requirements: The Know Your Customer (KYC) for a minor can be completed using the guardian’s documents along with the child’s birth certificate.
You cannot afford to make mistakes when investing in your children’s future. Investing in your child’s future is a vital step in ensuring their well-being and educational opportunities. The power of compounding is your strongest asset. Starting early enables even modest investments to multiply substantially over time. However, merely deciding to invest is not sufficient. Focus on your goals, choose your investment options wisely, and then determine when, where, and how to allocate your funds.
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Business NewsMutual FundsMutual Funds: Can small SIPs help you save enough for children’s education?
First Published:26 Mar 2024, 04:31 PM IST
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