Fund your children education via MF investment

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. It is one such financial goal that 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 becomes 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.  

As your child grows older and there comes a time 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 here is, which among the two is a better choice!

  Need analysis  

Before deciding on the route, you should do an analysis that will help you to understand how much the ballpark amount you would require for your child’s education after a certain period of time. This amount accounts for inflation. For example, if the cost of doing a four-year engineering course is Rs 6 lakh per annum, it will become Rs 27.8 lakh per annum after 16 years. It is assumed that the cost of education is rising by 10 per cent every year.   

Even the cost of general education, i.e. from primary to post-graduation has increased by an astonishing 175 per cent between the year 2008 and the year 2014, while the cost of professional & technical education has increased by 96 per cent.   

There are two ways in which you can pay your child’s education expenses. One is an education loan and the second is through a mutual fund. Let us understand which one is better.    

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 16 per cent, depending upon the amount of loan and type of education for which the loan is sought. There are a few lenders who extend an additional 0.5 per cent concession to girl students. Moreover, students can get a further concession of 1 per cent if they start paying off the loan during the moratorium period. In terms of taxation, one can avail of tax benefits under Section 80E on the interest paid for a maximum period of eight consecutive years.   

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. 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 loans and mutual funds. We calculated the equated monthly installments (EMI) on education loans assuming a 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 should invest purely in debt funds with a post-tax rate of return at 6 per cent if the target amount is Rs 50 lakh. The only difference is that MF SIP needs to be done earlier and EMI, you can pay after availing of the loan.   

Monthly outflow to reach Rs 50 lakh  

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