Should you invest in mutual funds to create corpus for your child’s higher education?

If you have a young son or a daughter, investing for their higher education is a no brainer. Some tend to invest in PPF, whereas some have a special love for fixed deposits (FDs). A few prefer to invest in the tax-saving instruments such as National Savings Certificates (NSC), Kisan Vikas Patra or Sakanya Samriddhi Yojana (SSY). 

The more ambitious ones, however, may opt for mutual funds. But is this advisable to invest in mutual funds to create corpus for your child’s higher education? Well, it certainly is, advise experts as long as it is done with proper planning and under the right guidance. Let us find more on this. 

“Parents are under huge pressure to accumulate a corpus for their kids’ education purposes. Education inflation should be considered at 8 to 10% every year. Equity Mutual funds can be good options, along with PPF and SSY (especially for girls), to achieve the required corpus for educational purposes,” says Preeti Zende, a Sebi-registered investment advisor and founder of Apna Dhan Financial Services.

Mutual funds for higher education

Should you invest in mutual funds for higher education?

Higher education needs tend to arise when the child is 18 (for undergraduate degree) or 21 (for master’s degree). This means the time horizon is long enough to invest in mutual fund scheme. So, one can invest in mutual funds across categories to save for your child’s higher education.

What is the ideal debt-equity ratio in mutual funds when you save for child’s higher education?

One expert we spoke to recommends that the ideal debt-equity ratio is 30-70 in favour of equity when the time horizon is 7 years or longer. On the other hand, when time horizon is shorter than seven years, one may invest 50-50 in equity and debt.

“When time horizon is long, investors should have a higher allocation to equity,” says Sridharan S., founder of Wealth Ladder Direct.

“One can have a good blend of index funds, flexicap and midcap funds in the ratio of 40:40 and 20 or 50:35:15 as per your risk-taking ability,” adds Zende.

When education loans is available, why should one invest in mutual funds for children’s education?

One should invest in the children’s education because there should always be an option to fall back upon. Moreover, education loan tends to inculcate financial discipline among children. When they spend a huge sum on their education, they should be responsible enough to recover the cost.

“It is recommended to save enough corpus for children’s education. As a parent, we should be prepared for the worst case scenario of economy wherein the child fails to get a high paying job right after the degree . But it should be the moral responsibility to the child to pay back the money,” adds Sridharan.

What are the factors one should consider at the time of calculating total cost of education as the child grows up?

It is important to factor in inflation for the number of years which are ahead of the financial goal. For instance, if the financial goal is 10 years away, and inflation grows at 5 percent per annum, then 5 percent for each year should be factored in before arriving at the total sum required. “It is vital that one considers inflation for the country you intend to go,” adds Sridharan.

Apart from mutual funds, what other smart investment one can make?

Apart from mutual funds, one can invest in the currency of the destination country so that spike in currency does not botch up your calculation. “One can consider investing in the currency of that country where you intend to go,” says Sridharan.

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