Mutual funds offer a wide range of investment options to the investors, to suit different risk profiles, investment horizon, and financial goals. An investor may choose to invest in equity schemes, debt schemes, hybrid schemes, solution-oriented schemes, index funds, etc. as per their financial plans. One of the primary financial goals for a parent is planning for their child’s education. With high emotional value attached to this goal, one always intends to plan the best for his/ her children.
Importance of investing in mutual funds for children's future
Planning for the child’s career is often one of the significant financial goals for parents. It is generally conceived that one should start planning for their child’s education at an early stage. Prudent planning and smart future investment plan from an early stage often helps the parents to provide a broader range of education options.
One should help their children choose the right career after considering their interests, potential, and dreams. Parents should also encourage their children to pursue what they enjoy doing and what they may achieve, given their potential. They should also encourage them to acquire fundamental life and work skills to make them independent.
When it comes to planning education goals, it may generally be considered a long-term financial goal. This is because the planning for such a goal should start from an early age of the child.
For such goals, one may choose to invest in their own name or in the name of their minor children. If the investment for future is being made in the name of minors, the payment is accepted from the bank account of the minor or from a joint account of the minor with the guardian only as per the SEBI Regulations. Upon the minor attaining the status of major, the minor in whose name the investment was made is required to provide all the KYC details, updated bank account details including cancelled original cheque leaf of the new account. No further transactions are allowed in such accounts till the status of the minor is changed to major.
How to Select the Mutual Fund for Your Kids' Future
Planning towards the education of children may generally be classified as medium to long term financial goal depending upon when one starts investing. Here is how one may adopt a systematic approach towards this financial goal:
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Calculate the Current Costs
This is the first step in planning for any financial goal. While one is quantifying the goal, one must research about different career options for the child based on his/ her inclination to various subjects. If one starts during the early years of a child’s life, one must estimate a reasonable sum towards the education goals. Such amount may be reviewed at a later stage as and when the circumstances arise.
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Adjusting the Costs for Future
Once the current costs are estimated, one must adjust the future savings plan as per the expected inflation over the period. In other words, the goal should be based on the expected education costs in the future, instead of the current costs. For example, if an educational course presently costs Rs. 15 lakhs, such costs will amount to around Rs. 48 lakhs after 15 years, assuming 8% inflation.
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Choosing the Right Investment
Once one has decided to start investing, it is paramount to choose the right vehicle to reach the destination in time. Since saving for education generally comes with long term investment horizon, one may invest in equity funds to reap the benefits of long-term wealth creation potential of equities. Better returns over the investment period enable the investor to achieve the desired financial goals with a lower investment per month. Such savings may be channelised towards fulfilling other financial aspirations if required or enhancing the corpus toward existing financial goals.
The investments must also match the required investment horizon. While equities may be highly desirable for long term financial goals, it may not be advisable to invest in equity funds for short-term goals. This is because equities tend to be volatile over the short term. So, if one starts investing late for their financial goals, they may not only have to shell out a higher amount to compensate for the lost period but also may have to be content with lower returns.
Given the different investment considerations, one must adopt a systematic approach to invest in the right mutual fund scheme for their children. This allows the investors to accumulate the desired corpus in a time-bound manner, and one may not need to restrict his/ her child’s dreams and aspirations due to financial reasons.
Types of Mutual Funds Suitable for Children
Once the goal has been quantified, one should prepare a roadmap towards achieving such a goal. One may consider investing in Children’s Funds, which are specially designed towards planning for child goals.
These are specific solution-oriented mutual fund schemes carry a lock-in period until the child attains majority, subject to a maximum lock-in period of 5 years. Such a lock-in period allows the parents to resist the temptation to redeem the investments at an early stage.
Considerations for Investing in Children Mutual Funds
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Regular Investing through SIP
One should register a SIP (Systematic Investment Plan) for steady and consistent investment towards accomplishing their goals. When the investors make goal-oriented investments, such goals work as an intrinsic motivation for them to continue their investment journey towards the desired destination.
SIP also allows the investors to continue investing irrespective of whether the markets are moving higher or lower. Once a SIP has been registered, the investment amount is deducted automatically from the bank account periodically and invested in the specified mutual fund scheme.
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Reviewing the goal and investment performance periodically
One must regularly review the financial goal, as the assumptions taken at the time of formulating the financial plan may have changed over the period. Such changes may happen in the education costs, prevailing inflation, changes in the child’s preferences, etc.
Parents must suitably adjust their financial goal accordingly, to let the investments stay relevant. Similarly, one should also review investment performance regularly. This ensures that any shortfall in the portfolio performance may be rectified well within time, and the goals may be achieved in a time-bound manner.
With a child’s education and career planning being one of the significant roles and goals for parents, one must adopt a systematic approach towards such goals.