Planning For Your Childs Education With Mutual Funds

As your child grows older and there comes a need to pay for acquiring a profession-targeted degree, you have the option of either taking an education loan or using your investments in mutual funds to cover it. The question is about which is a better choice

Indian parents spend a lot of time looking out for the best of everything for their children. The environment that kids are exposed to today is drastically different from the one that you might have experienced in your childhood times. That said, in today’s times kids have a plethora of opportunities available while the world is getting increasingly competitive. Hence, all parents want their children to develop holistically to get ready for challenges of the future. Education remains one of the best ways to face such challenges and hence no parent wants to compromise on that front.

In fact, there are four major financial fears in one’s life and being able to provide the best education to their child is one of them. Further, as it is a need and not a want, it is one such financial goal which cannot be deferred to any future date. Therefore, no parent would like to go wrong with it irrespective of his or her financial situation. As such, proper planning for your child’s education is important. Even if you don’t have kids at present, it makes more sense to dedicate some part of your savings to their education in order to be prepared with the funds when required. It’s simple: the earlier you start the lesser you would need to save.

However, another school of thought believes that children should take accountability of their own education This is done by opting for an education loan through which children would pay for themselves, making them more responsible. Whichever way you go, by planning your child’s education through savings and investments will ensure you at least have a choice left with you. Further, you can have peaceful sleep knowing that your child’s education is taken care of. It is here that proper analysis and planning is called for.

Need Analysis

Need analysis would help you understand how much ballpark amount you would require for your child’s education aspirations. This amount accounts for inflation. The image alongside shows an example of how it can be done.

According to the National Sample Survey Office (NSSO) report on average cost per student from 2008–2014, the cost of a four-year engineering course was around Rs 6 lakhs in 2017. If we assume inflation of 10 per cent, then in 16 years from the year 2017, the cost would be whopping Rs 27.8 lakhs. Even the cost of general education, i.e. from primary to post-graduation, has increased by an astonishing 175 per cent in the same period (2008-2014), while the cost of professional and technical education has increased by 96 per cent.

In this case we have only considered the cost of an engineering course. If we move on to a medical course, the amount is much higher. And just imagine the cost of education for those having two or three kids. Hence, having an education plan in place is crucial. Doing a need analysis would help you understand how much on an average you need to save for your child’s education.

Education Loan and Mutual Fund

Consider a parallel example: there are two ways to avail a mobile operator’s service – pre-paid and post-paid. In pre-paid you pay for the service before availing the service whereas in post-paid you first avail the service and then pay for the same. Similarly, there are two ways to go about education planning. One being through education loan (post-paid) and another being mutual funds (pre-paid). In the following paragraphs we shall find out whether it makes sense to go for an education loan or invest in mutual funds.

Education Loan

Education loan is said to be a good option with its comparatively lower interest rate, which ranges anywhere from 7.95 per cent to 15.2 per cent. There are a few lenders who extend an additional 0.5 per cent concession to girl students. Moreover, students can get further concession of 1 per cent if they start paying off the loan during the moratorium period. In terms of taxation, one can avail tax benefits under Section 80E on the interest paid for a maximum period of eight consecutive years.

This period starts from the year in which you begin loan repayment or till the interest is fully paid, whichever is earlier. Further, if you wish to avail an education loan, you need a co-applicant such as your parent or spouse. Even lenders may ask for a third-party guarantor if the loan amount exceeds Rs 4 lakhs. If the loan amount exceeds Rs 7.5 lakhs, then additional collateral security might also be required.

Mutual Funds

Mutual funds are not new anymore as a lot of campaigning has been done in recent times to make people more aware of the benefits of investing in them. For instance, the Association of Mutual Funds in India (AMFI) has signed such leading celebrities as Mahendra Singh Dhoni and Sachin Tendulkar as brand ambassadors for its ‘Mutual Funds Sahi Hai’ campaign. A lot of awareness has been created for mutual funds specifically targeting retail audiences. In fact, according to a report from AMFI, 63 per cent of the assets from B 30 locations are in equity mutual funds and T 30 accounted for 35 per cent of the assets as of July 2020.

T 30 refers to the top 30 geographical locations in India and B 30 refers to locations beyond the top 30. Therefore, there is no doubt that mutual funds are gaining a lot of traction. However, people are still not doing any planned investments. The usual mentality is to invest in a mutual fund whenever there is any surplus money. This is done without considering the financial goals. Undoubtedly, this leads to a poor investment experience. Mutual funds have a gamut of schemes suitable for various needs and risk profiles. Therefore, one can plan for a child’s education through a dedicated portfolio.

Choosing the Right Option

To understand it better let us compare both education loan and mutual fund. We calculated the equated monthly instalments (EMI) on education loan assuming 7.95 per cent rate of interest and three different timeframes of 10 years, 15 years and 20 years. Further, with similar timeframes we calculated the systematic investment plan (SIP) for mutual funds. We have assumed that you invest purely in debt funds with post-tax rate of return at 6 per cent. The target amount is Rs 50 lakhs. The infographic below elucidates which is better among education loan and mutual fund.

The above illustration clearly shows that mutual fund is the best option for your child’s education. Even if you are assuming lower rate of returns, mutual funds are able to achieve your target amount by investing much lesser than what you might end up paying via EMI.



Conclusion

Planning for your child’s education is indeed a very crucial thing and it will help you save the cost that you might end up paying in the form of EMIs. From the comparison between the two i.e. education loan and mutual funds, the latter certainly seems to be one of the most effective ways of planning for your child’s education. Planning in advance for such a need with the help of mutual funds will save a major portion of your income, which can then be used in saving for other financial goals.