5 Reasons to Invest in Mutual Funds for Your Child’s Education Planning

1. Potential for Higher Returns

Mutual funds offer the potential for higher returns compared to traditional savings options like fixed deposits or savings accounts. This is because mutual funds invest in a diversified portfolio of stocks, bonds, and other securities, which have historically delivered higher returns over the long term. By investing in equity mutual funds, you can benefit from the growth potential of the stock market, which can significantly enhance your savings over time.

The cost of education is rising rapidly, with an estimated inflation rate of 6-8%. When planning for overseas education, you also need to account for a 3-4% currency depreciation. Combined, this means that the cost of international education may increase by 8-12% per annum.

Given the steep rise in education costs, the primary reason to choose mutual funds over other investment products is the potential for significant growth. Mutual funds can generate annualized returns of 10-15% over the long term, whereas other investment products like fixed deposits (FDs), recurring deposits (RDs), and Sukanya Samriddhi accounts typically offer only 5-8% per annum.

This difference in the rate of return—around 5-7% per annum—between mutual funds and other traditional investment options results in a substantial disparity in the final fund value over a long period. The higher fund value from mutual funds can help meet large financial goals, especially when the money available for investment is limited

Example: If you start investing ₹30,000 per month in an equity mutual fund with an average annual return of 12%, in 15 years your investment could grow to approximately ₹1.5 crores. In contrast, the same amount in a fixed deposit at 6% annual interest would yield only about ₹88 lakhs.

2. Systematic Investment Plans (SIPs):

One of the most convenient features of mutual funds is the option to invest through Systematic Investment Plans (SIPs). SIPs allow you to invest a fixed amount regularly (monthly, quarterly, etc.), making it easier to discipline your savings habit and take advantage of rupee cost averaging. This means you buy more units when prices are low and fewer units when prices are high, which can reduce the overall cost of your investments.

Example: Suppose you start a SIP of ₹40,000 per month in a mutual fund. Over 18 years, assuming an average annual return of 12%, you could accumulate around ₹3crores. This disciplined and systematic approach ensures you consistently invest towards your child’s education goals.

3. Flexibility and Liquidity

Mutual funds offer significant flexibility and liquidity compared to other investment options like public provident funds (PPF) or traditional child insurance plans.

Withdrawals from the funds accumulated for your child’s education are required at different times for various purposes. For instance, college fees are typically paid semester-wise, while accommodation and regular expenses are paid monthly.

Traditional products like fixed deposits (FDs), recurring deposits (RDs), and money-back policies disburse the entire maturity amount in one lump sum. This often results in the investor keeping the amount in a savings account, creating anxiety over the risk of spending it on non-essential items.

In contrast, mutual funds offer absolute flexibility, allowing investors to withdraw the needed amount as required. There is no obligation to withdraw the entire investment at once into a savings account. The remaining corpus stays invested and continues to generate returns. Additionally, investors can create a regular income stream from mutual funds through a Systematic Withdrawal Plan (SWP), which can be used to fund the child’s ongoing expenses.

Also there is an additional flexibility to start or stop SIPs at any time, switch between different mutual funds, and redeem your investments partially or fully as per your needs. This flexibility allows you to adjust your investment strategy based on changing financial goals or market conditions.

Example: If you need funds for your child’s school admission fees, you can easily redeem a portion of your mutual fund investments without disrupting the overall financial plan for higher education.

4. Tax Efficiency:

Similar to other investment options, mutual funds allow investments to be made in the name of a minor child. This becomes particularly tax-efficient when the child reaches adulthood.

When investing in the name of a minor, the interest earned on products like fixed deposits (FDs), recurring deposits (RDs), and National Savings Certificates (NSCs) is clubbed with the guardian’s income and taxed in the same financial year it is earned. In contrast, gains on mutual funds are taxed only at the time of redemption, which is typically expected when the child reaches the age for higher education. By this time, the child will have attained majority, and the gains will be taxed in the child’s name rather than the guardian’s. Since children usually do not have any other income when they come of age, the gains attract minimal or no tax liability.

Thus, investing in mutual funds allows an investor to efficiently plan for their child’s education fund while also reducing their current tax liability.

5. Professional Management and Diversification

Mutual funds are managed by professional fund managers who have the expertise and resources to analyze markets, select securities, and manage portfolios effectively. By investing in mutual funds, you benefit from their professional management and the diversification of your investments across different asset classes and sectors. This diversification reduces risk and enhances the potential for stable returns.

Example: A well-diversified mutual fund portfolio might include investments in large-cap, mid-cap, and small-cap stocks, as well as bonds and money market instruments. This diversification helps mitigate the impact of market volatility on your investments, providing a more stable growth trajectory for your child’s education fund.

Net Brokers believes that mutual funds offer a robust and flexible investment avenue for planning your child’s education. With the potential for higher returns, systematic investment options, flexibility, tax efficiency, and professional management, mutual funds can help you build a substantial corpus to meet the rising costs of education. By starting early and investing regularly, you can ensure that your child’s educational aspirations are well-supported, giving them the best start in life.

Planning for your child’s future is a long-term commitment, and mutual funds provide the tools and advantages to make this journey both manageable and rewarding. Consider consulting with us to tailor a mutual fund investment plan that aligns with your financial goals and risk appetite, ensuring a bright and secure future for your child.

Net Brokers is a well-established and reputed financial services firm firm that offers objective personalized investment plans to the clients and helps them get the best value for the money they spend.

For more information, get in touch with us today! Download our mutual fund app & start investing for your long-term financial goals.