Giving a premium higher education to children has always been a top aspiration and desire for every parent. It is estimated that in India, the primary and secondary education inflation is around 12% and that of Higher education is between 16% – 20% (depending on the institution). This calls for great preparedness and planning on Investment, to meet the future cost close to actual. Equities have the track record of delivering returns beyond 14% – 15% over a longer time period. Systematic Investment Plans in Mutual Funds is the best way of investing in Equity Market, as they play in favour of Value Investing in both bull and bear markets, with compounding and cost averaging, respectively. For first timers, SIP is an investment method in which Investors choose to invest a fixed sum every month on a pre-selected date in a mutual fund scheme, and for a pre-defined period (which ideally should align with number of years to reach the goal). Since Investment happens every month, it eliminates the risk of timing the market. When the price of the selected mutual fund unit, technically called as Net Asset Value (NAV), goes down due to the drop in market value of portfolio, Investor buys more units. When the price (NAV) goes up, Investor buys lesser units, thereby achieving a better Average Purchase Price over the investment tenure.
Data shows that in India, over a 15 year period, the average returns delivered across 80 Mutual Fund schemes is around 18%.
Parents can plan well in advance for their children’s education by calculating the present average cost of education, the expected future cost (at certain inflation rate) and start investing towards that.
The advantage of starting early is that, one needs to invest a very nominal amount, than what is required, if it is delayed by say 3 or 5 years.
Arithmetic shows that to reach a corpus of Rs. 30,00,000 in 16 Years, one needs to invest Rs. 4,160 per month in an investment that grows at 15%. The monthly investment requirement goes up by 50%, if the same is delayed by 2.5 years.
Investment in mutual funds through SIPs is the best strategy towards securing child’s future.
Posted: June 2018