Common Myths about investing in Mutual Funds for your child’s future. Busted!

Mutual funds could be the appropriate tool for parents to build a corpus for their children’s future, as it gives multiple options to choose from different asset classes, such as equity, debt or both. It also offers you professional money management along with the ease of investment processes. However, most investors face the initial hindrance due to common myths about investing in Mutual Funds, which actually could be totally false. Here are some:

Myth: You need a huge income flow to start planning for your child’s future needs

Fact: You need not have a large income to start planning for your child’s future needs.

You can actually start with the little bit of your savings that you already have and begin investing in a mutual fund (MF) through systematic investment plan (SIP). SIP could help you invest regularly with even as little as Rs 500 per month. But, remember that you need to start investing early to allow the money to undergo compounding and yield superior results.

For instance, if you start investing Rs 10,000 per month for your child’s education needs 18 years hence, assuming that the money grows at 12% every year you would have close to Rs 71 lakh at the time. But, with a year’s delay, you will end up with about Rs 62 lakh, or a shortfall of Rs 9 lakh*.

So do not let the fear of huge paycheques keep you from taking the first step towards making your child’s dreams come true.

Myth: When investing for your child’s future, it is better to stick to conventional investment solutions
Fact: Those investments that seemingly give stable returns could lose out on inflation and taxation.

For instance, if your investment of Rs 100 in a bank fixed deposit earns 9% per annum, and you are in the 30%, you eventually get Rs 6.30 after deduction of tax. If you take inflation into account, of say, 6% every year, your actual gain is a mere 0.30 per cent.

Since investing for your child's future requires substantial amount of money that needs to be accumulated over the long term, it could be prudent to invest in equities, and the smarter option could be to invest through mutual funds. Equities are known to deliver returns that remain far ahead of inflation over the long-term and also entail several tax advantages beyond the first year of holding the investment.

While conventionalism is a safe bet, your child’s dream requires more. Therefore, do not keep yourself from exploring investment options that could allow you to plan better.

Myth: A stock market downturn could wipe out your mutual fund investment which could have been an important savings for your child’s education

Fact: Mutual fund investments for your child’s future, especially those in SIPs are designed to ride the market ups and downs and build wealth over the long term.

An SIP works on the principle of rupee cost averaging. That is, by investing the same amount every month, you buy more units when the market is down and lesser units when the market is up. Over a period of time, the average purchase price per mutual fund unit gets lower. By investing through Systematic Investment Plans, the investor need not worry about tracking daily equity market movements or other undue worries.

Myth: It is usually said that the best time to buy mutual funds is when the market is down. But I should not invest as I lack the expertise and time needed to track my mutual fund investments.

Fact: Mutual Fund investments give you access to methods of professional fund managers who invest on your behalf and fund houses ensure availability of factsheets and performance measures help you keep an eye on your investment performance.

You do not have to follow the market closely while staying invested in mutual funds. Most importantly, mutual fund investments are not about getting the timing of your investment right, but about how long you stay invested.

Evaluating the progress of your mutual fund investments every six months is important. If you find a consistent laggard, i.e., a fund which has consistently underperformed, then that could be a good enough reason for you to shift to a better performing fund. Yes, equity fund investments are for the long term, but it’s equally important to ensure that you do not hold on to a consistently underperforming fund.

Not all common myths are not founded on facts. It is important for parents to see through them to plan for and provide children with the future they dream of. To ease the process of understand and investing, you could engage a financial adviser and make use of their knowledge and experience in Mutual Fund investments.

This article solely provides general information on financial planning and is not for solicitation of investments by L&T Investment Management Limited and/or L&T Mutual Fund. The information in this article should not be construed as providing investment advice and does not seek to address specific investment objectives, financial situations and particular needs of any specific person who may receive this information. The recipient of this article, therefore, should rely on his/her investigations and obtain professional advice (legal, tax and financial) before taking any investment decision, and should understand that statements made herein regarding future prospects may not be realised.

*Calculations in this article are based on assumed rates of return on investment and actual return on your investments could be more or less. Expenses, if any, have not been factored into the calculations and they could reduce the returns on investments. Calculations shown here do not in any manner imply or suggest performance of any scheme of L&T Mutual Fund.

Investments in mutual funds and secondary markets involve inherent risks. There can be no guarantee against gain or loss that would result from following any suggested asset allocation nor can there be any assurance that an objective will be achieved. Past performance may or may not be sustained in future.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully. CL02256

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