Securing A Child’s Future With Mutual Fund Investments

Securing their children’s future is a topmost concern for any parent. Given the rising cost of education thanks to inflation, it is often not possible to meet the needs by mere savings. However, if one puts into place an early investment plan, probably before the child’s first birthday, financial-related stress can be kept at bay. This will not only help in taking care of the higher education costs but also their marriage, among other requirements. A child’s future is nothing but one of the long-term financial goals with a gestation tenure of anywhere between 18 and 25 years.

A knowhow of the needed ballpark figure, taking into account the factor of inflation, is a must before starting the investment process. This helps decide proportionate investment. Else, lower than required investment may not yield the desired results. For instance, if higher education currently costs ₹20 lakhs, it will rise to about ₹54 lakhs if one takes 5 per cent inflation over the next 20 years. Similarly, the current cost of marriage, say at ₹15 lakhs today, is likely to increase to ₹52 lakhs in the next 25 years. 

To address these requirements, parents can consider using mutual funds – a long-term investment tool – for effectively securing their child’s future. Since the goals are long-term, typically 18-25 years away, it is preferable to choose equity over any other asset categories. It is advisable that your investments should be invested in an equity-oriented mutual fund scheme in a staggered manner, preferably through the SIP route. You may consider the following set of scheme categories for this purpose.

1. Large-Cap Fund: Such a scheme invests in stocks of sector-leading companies. This ensures you get exposure to the best of the businesses from the listed universe. Being diversified across sectors, such funds substantially reduce equity-related risk over the long term compared to say a theme or sector-specific funds. Based on the historical track record, one can expect such schemes to deliver a long-term CAGR of 10-12 per cent.

2. Flexi-Cap Funds: As the name suggests, such schemes have a flexibility to invest across market capitalisation i.e. large-cap, Mid-Cap and Small-Cap. As per the market valuations, and relative attractiveness, fund managers here will change allocation in order to yield the best possible return. One may expect a long-term CAGR of 12-15 per cent from such funds.

3. Balanced Advantage Funds: These are dynamically managed asset allocation funds which invest into both equity and debt. Here, the allocation to asset classes is dynamically managed i.e. when market valuation is cheap, the allocation to equities is increased and vice versa. For taking a call on the market, some of the fund houses adopt a model-driven approach such that the fund manager bias in no way affects decision-making. In effect, the scheme allows an investor to get the best of both the asset classes. One may expect a long-term CAGR of 10-12 per cent.

SIP it Along
SIP should be the preferred route to invest in each of the above mentioned scheme categories. As the income stream improves over the years, it is best if you can top up the investment such that savings will keep pace with the rise in income. For instance, if you start with a SIP of ₹6,000 with a yearly top-up of 10 per cent with an overall CAGR of 12 per cent, the portfolio value will be close to ₹81.7 lakhs in the next 18 years. You can easily take out ₹55 lakhs to meet the child’s education expenses and keep the balance invested for another seven years while continuing with SIP. By the time your child turns 25, you will have adequate corpus to address all marriagerelated expenses.

Without a top-up, you would be required to invest a monthly amount of ₹11,000. This would fetch you a little over ₹78 lakhs with a CAGR of 12 per cent. You may take out the required sum of ₹55 lakhs for education when the child turns 18 and keep the balance invested while continuing with the SIP. To conclude, given the established long-term performance track record which aids in risk-adjusted and inflation-beating returns, mutual fund investments should be actively considered for meeting the long-term financial requirements related to children. The key is to remain patient and be disciplined and regular with investments.

The writer is Managaing Director,Midas FinServe Pvt. Ltd. ■ Email : rajesh @midaswealth.co.in ■ Website : www.midasfinserve.com