How can you plan for your childs education with mutual funds?

In India, we believe in not pressurizing our children earn and learn rather we try to fund our child’s education till he gains his or her masters and when it comes to child’s education we are very much sensitive. Taking advantage of these emotions many insurance companies and mutual funds have launched child plans. They are not bad nor better enough than a diversified mutual fund portfolio. So now the question would be what is the ideal portfolio to fund child’s education?

Remember, there is nothing called ideal as everyone is different when it comes to his/her own finances and psychology. So there cannot be one ideal portfolio. However, everyone may have their individual ideal portfolios based on their lookout towards risk and suitable investments. While devising any portfolio it is very important to take risk also into consideration. So, the first task is to assess your risk taking ability. Then based on your risk appetite and the time horizon, you should decide upon your mutual fund investment.

There is no thumb rule as to how much you must invest in a particular category of mutual fund. But looking at broader asset class one must have a minimum 20 per cent to 25 per cent and maximum 75 per cent to 80 per cent in equities and the remaining in debt. Now the you may ask why to invest in debt even if the time horizon is long-term? This is because in case if due to certain reasons equity market is not going as desired then this debt portion can act as a cushion.

Now whether mutual funds can help in funding child’s education? Then let us figure it out with the help of an example. We assume that in today’s term you would need Rs. 1 lakhs every year for four years to fund your child’s graduation which is going to start in 10 years from today. Also assuming you invest 70 per cent in equity and 30 per cent in debt, where equity gives CAGR (Compounded Annual Growth Rate) of 12 per cent and debt gives CAGR of 8 per cent. So assuming education inflation of 10 per cent you would require Rs. 10.26 lakhs after 10 years. To achieve this today you need to invest approx. Rs. 3,500 per month and Rs. 1,500 per month in equity mutual fund and debt mutual fund, respectively via SIP (Systematic Investment Plan) and in case you have a lumpsum amount available to invest you would need to invest approx. Rs. 2.58 lakhs in equity and Rs. 1.1 lakhs in debt mutual funds to achieve Rs. 10.26 lakhs after 10 years to fund your child’s education. However, it is to be remembered that you need to re-balance your portfolio at least annually to maintain your investment strategy.