Top 5 Reasons to Consider Mutual Funds for Child Education Planning

In India, parents are keen on giving their children the best education possible whether it's within the country or abroad. However, with the constantly evolving education system this ambition comes with a hefty price tag. Graduating in India itself can cost parents lakhs of rupees while studying abroad can run into crores. This makes planning for a child's education a top priority for parents.

To meet this goal, parents often rely on different savings products to accumulate funds. Some popular choices include schemes like Sukanya Samriddhi Yojana for girls, fixed deposits, recurring deposits, life insurance policies, Public Provident Fund and real estate investments. While these options offer a way to save money with relatively safer returns, they may not fully address the various needs that come with planning for a child's education.

Now, let's deep dive into the challenges of planning for a child's education and why mutual funds stand out as a preferred choice over other investment options for this purpose.

1. Investment Growth

Education costs are going up fast every year, price of education might increase by 6 to 8%. If you're planning to study abroad you also need to consider that the value of money in different countries can change. On average, this could add another 3 to 4% to the cost every year. So, in total, studying internationally could become 8 to 12% more expensive each year.

To tackle this many people choose to invest their money in different ways. Mutual funds are a popular choice because they can potentially grow your money faster than other options like fixed deposits or recurring deposits. Mutual funds, especially the growth oriented ones aim for returns of around 10 to 15% annually over the long term.

let's say you have a child who will be going to college in 10 years and it currently costs 10 lakhs. With an inflation rate of 7%, it could cost around 20 lakhs in 10 years. If you have 5 lakhs now to invest for your child's education and you put it in a fixed deposit with a 6% annual interest rate it would only grow to about 9 lakhs in 10 years. That's not enough to cover half of the future cost.

But if you put that same 5 lakhs into mutual funds with an average return of 12% per year it could grow to about 15.5 lakhs in 10 years. That's much closer to what you'll need for your child's education.

However, it's important to understand that mutual funds come with risks. Their value can go up and down which means you might not always get back what you put in. Fixed deposits and recurring deposits on the other hand are safer options because they guarantee returns.

But if you have a long time before you need the money like 5 years or more and you don't have a lot to invest, mutual funds might be a good choice to consider. They have the potential to grow your money more than safer options which could help you reach your financial goals, like funding your child's education more effectively.

2. Tax Saving

When you invest in your child's name through mutual funds, it's a smart move for a couple of reasons. First off, when you invest in traditional options like Fixed Deposits, Recurring Deposits or National Savings Certificates, while your child is still a minor any interest earned gets added to your income for tax purposes. That means you're taxed on it right away, which can eat into your savings.

But with mutual funds it's different. The gains you make aren't taxed until you actually sell your mutual fund units, which you might do when your child is ready for higher education, for instance. By then, your child has likely become an adult and they'll be taxed on those gains not you. Since most kids don't have other income when they hit adulthood they often fall into a lower tax bracket or even pay no taxes at all on those gains.

So, by investing in mutual funds in your child's name, you're not only planning ahead for their education fund but you're also potentially reducing your current tax bill. It's a win win situation for both you and your child's financial future.

3. Flexible Withdrawals

When you're saving up for your child's education you'll need to spend that money at different times for different things, like paying college fees or covering monthly expenses.

Now, there are traditional ways to save money, like Fixed Deposits or Recurring Deposits where you get all your money back at once when it matures. But once you have that lump sum, it's easy to feel tempted to spend it on other things, right?

On the other hand, there are mutual funds. These give you more flexibility. You can withdraw the money you need when you need it without taking out everything all at once. So, if you need to pay college fees this semester and cover living expenses next month you can do that without worrying about spending all your savings. Plus, the money that's left in your mutual funds keeps working for you, earning returns. And if you want a steady income to cover regular expenses, you can set up Systematic Withdrawal Plan from your mutual funds.

4. Flexible Duration of Investment

Most investment options have fixed dates when your investment matures but these dates might not line up perfectly with when you need the money, like for your child's education.

Let's say your child's graduation is in 6 years. You have the choice to put money into a fixed deposit for either 5 years or 10 years. If you pick the 5year FD, your money will sit idle for the last year. If you choose the 10year FD and need the money earlier, you'll face penalties for taking it out before the maturity date.

However, with growth mutual funds, there's no fixed maturity date. You can invest for the exact time you need the money, adjusting as necessary. So, if your child's graduation gets delayed by a year, you can extend your investment period. Likewise, if you need the money earlier than expected you can withdraw it sooner.

In mutual funds, you decide when your investment matures based on your goals and needs offering flexibility that fixed options like FDs may not provide.

5. Invest any amount, anytime

When it comes to saving for a child's education, it's a big financial commitment that usually requires a portion of your investment funds. But the amount of money you can invest might change over time as your earnings fluctuate. So, what you need is an investment option that's flexible.

Now, traditional options like the Sukanya Samriddhi account or fixed deposits come with some pretty strict rules. With Sukanya Samriddhi account you can only invest in the name of a girl child and there's a maximum limit you can put in each year. And fixed deposits require you to put in a big chunk of money all at once and once you've done that, you can't add more money to it until it matures.

But here's where mutual funds come in and save the day. They offer total flexibility to investors. You can invest in them either by putting in a lump sum of money or by setting up a Systematic Investment Plan. With SIP, you can start investing with as little as Rs. 500 and you can choose how much you want to put in after that. Plus, you can add more money to your mutual fund whenever you have extra cash available. This makes it super convenient for you to build up your savings for your child's education without feeling too tied down by rigid rules.

Conclusion

Planning for your children's education is crucial. While there are many ways to save money for this, mutual funds stand out for their potential for higher growth and flexibility. With mutual funds you can pool your savings into one investment, potentially building an amount over time to cover the increasing costs of education. This approach offers both growth and adaptability, allowing you to adjust your investments as needed to meet your goals.