Child Education: A Guide to Choose The Right Mutual Fund for Higher Education

Before you choose a particular mutual fund, you will have to understand the objective of your investment. Should you want to save for your child’s higher education, you will, in all likelihood, have time till your child grows up to be 18.Considering the rate of inflation and rising education expenses, the cost of any course can well run into lakhs (or much more) by the time your child is ready.

Choosing the ‘right’ mutual fund should rest on factors such as your investment horizon, risk appetite, target corpus, need for returns and the rate of education inflation. Read on to know more about the parameters:

• Risk-averse investor with a short-term investment horizon You can consider debt funds that primarily invest across fixed-income securities -- for example, corporate securities, bonds, government securities and other money market instruments. While debt fund investments are relatively less volatile, their returns also tend to be on the lower side.
• Investment horizon of more than ten years You can consider investing in equity funds , considering these have the highest potential for growth and delivering inflation-beating returns. However, an equity fund investment will be relatively more volatile. On the brighter side, their returns exceed those of money market instruments.
• Relatively risk-averse investor with a long-term investment horizon In this scenario, you can consider investing in diversified equity funds that seek to generate long-term capital appreciation through diversification across sectors, irrespective of size and market capitalisation. As these don’t focus on a specific industry, such an investment has the potential to check risks and earn formidable returns, even amid challenging economic cycles.Alternatively, investing in balanced (hybrid) funds is another alternative that offers the best of both worlds, enjoying a 50-70% equity exposure and the remaining invested in debt instruments. By doing so, these try to achieve a balance between high returns and a low degree of volatility.

1. Risk appetite and investment horizon
2. Fund performance It is essential to analyse a fund’s long-term and short-term performance, and compare it with the benchmark like NSE Nifty and BSE Sensex. A higher index over a protracted period of indicates superior performance; however, past returns can never be a guarantee of future fund performance. Instead, it can only serve as an indicator.Importantly, make sure the funds that you choose have delivered consistent returns over the long haul and across market cycles. Whirlwind returns can never be good indicators of potential fund performance.
3. Diversification You should consider investing across multiple funds to build a diversified portfolio. This way, you can benefit from the expertise of different fund managers and achieve the much-needed diversification, the core tenet of investing.Also, the fund’s underlying stocks should ideally not be concentrated in a specific sector. That way, should one sector underperform, the others can make up for the dip in returns.
4. Performance of fund manager The fund manager’s expertise and performance at the helm of the fund is an important factor while c hoosing the right mutual fund for your child’s higher education . As an investor, you should ideally look at the fund manager’s past performance as well to develop a comprehensive idea.
5. Expense ratio Expense ratio refers to the fees that the AMC levies with regard to the administration, management and promotion of a mutual fund. SEBI has capped these charges at 2.5% of the total assets of the fund. Direct plans entail a lower expense ratio vis-à-vis the regular plans. In general, lower the expense ratio, higher the net returns.Besides, make sure to keep a tab on the scheme’s assets under management (AUM). Simply put, this figure indicates the number of subscriptions received by the scheme.

When investing for your child’s education, one of the best approaches is to leverage the Systematic Investment Plan (SIP) mode. This strategy is ideal, no matter you are a salaried professional or run your own business. Also, investing a surplus (according to your financial objectives and convenience) periodically will help to build wealth in a sustained and disciplined fashion.

• Target corpus - Rs.1 crore
• Investment horizon - 16 years (considering your child is 2 years now and will be ready for higher education by he/she is 18)

In this case, taking average annualised returns for a 10+ year-investment horizon to be 12% , you will be able to amass a corpus of Rs.1,09,20,049 (approx.) with a SIP amount of Rs.20,000 per month.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.