Should you be investing in mutual funds to plan your child's higher education?

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Savings for your child's college or professional education have become more important than before, particularly in India where the cost of higher education is increasing at 10-12% per annum. Whether it's an engineering degree from a premier Indian institution or an MBA from abroad, the money requirement can be heavy. An early start not only allows you to save a good corpus but also lightens the burden of the last few years approaching admission.

How mutual funds are part of the education objective

Mutual funds are becoming the most popular investment choice among parents because they can provide market-linked returns and diversification over various time spans. In contrast to conventional fixed deposits or endowment policies with lower returns, mutual funds—especially equity and hybrid schemes—can beat inflation in the long run. For instance, an investment in a SIP in an equity mutual fund for 10-15 years might be able to generate a substantial corpus that increases along with your child.

Selecting the suitable mutual fund according to your time horizon

The mutual fund will depend upon the number of years you have before the money is required. For long-term objectives (over 10 years), equity mutual funds like large-cap or diversified schemes are appropriate as they have more growth opportunities. For mid-term objectives (5-10 years), hybrid funds are a mix of growth and safety through investment in both equities and debt instruments. As the target approaches, say in the last 3-5 years, converting your corpus to debt funds or low-risk hybrid funds will keep your capital safe and also cut market volatility.

The advantage of disciplined investment through SIPs

One of the primary advantages of investing in education savings through mutual funds is the facility of SIPs. SIPs enable you to invest a predetermined amount periodically—monthly or quarterly—so budgeting and sticking to it become manageable. They also benefit from rupee cost averaging and the power of compounding, both of which work in your favour over the long run. A modest SIP of ₹5,000 over 15 years can grow into a significant sum, assuming an average annual return of 10-12%.

Tax efficiency and flexibility add to the appeal

Mutual funds are also tax-efficient compared to traditional investment options. Capital gains from equity mutual funds held for over a year are charged at 10% after allowing an annual deduction of ₹1 lakh. Debt funds with a tenure of over three years are charged at 20% with benefits of indexation. Also, mutual funds do not keep your money stuck for years like ULIPs or child plans. You have control and flexibility to change the investment according to your changing finances.

A goal-based option for peace of mind

The secret to effective usage of mutual funds is to consider your child's education as a particular objective and invest accordingly. Project the cost in the future, factor in inflation, select proper funds, and check the progress every year. Not only will you remain on track, but this will also provide you with the assurance to fulfil your child's educational dreams without any financial worry. Mutual funds, if utilized wisely and at the right time, can be one of the most powerful instruments to fund your child's education.