You may have a bank savings account, fixed deposits, Public Provident Fund (PPF), provident fund savings, gold investments, and even a small plot of land. These would make you question the need to invest separately for your child’s needs even before the child is born. However, a closer look at your financial world will reveal a very different picture. For instance, popular fixed-income investments with predictable returns, such as bank fixed deposits make you lose out in the long term due to inflation and taxation.
On the other hand, if you invest in mutual funds which pool money from small investors and invest in stocks, especially those that invest in equities, you could, over a period of 8-10 years or more, get annual returns of 12%, and that, too, tax-free. This is not the only type of situation where mutual fund investments deliver better outcomes than many popular investments. There are also several other categories of mutual funds apart from equity funds that ensure that your various needs are better met.
Your child’s needs may be very different from what you think they are now. Investing through Mutual Funds, could help you be prepared before hand for all kinds of surprises.
But why Mutual Funds as an investment route? Here is why.
Professional money management by market experts
When you invest in mutual funds, your money gets managed by expert fund managers, giving you access to their investment skills and knowledge, and thus providing you with experienced investment practices.
Regular and easy installments
Mutual funds help you invest regularly through systematic investment plans (SIPs) to build a sizeable corpus for different imminent, medium- and long-term needs. Through SIPs, you can regularly invest a fixed amount in different mutual fund categories such as equity, debt and liquid funds in varied periodic intervals. You can start with an amount as low as Rs 500 per month for equity schemes and later enhance it, thereby making systematic progress towards planning for various requirements.
Range of asset classes to invest in
Through mutual funds, you get to invest across different asset classes, such as equities, debt, or a mix of them, such as debt and equity, as in hybrid funds.
A mutual fund for every need
There is no exaggeration in saying that there is a mutual fund for every major need. For instance, for your short term needs or emergencies, you could invest in liquid funds that primarily focus on investing in debt and money market investments. On the other hand, debt funds, where investors’ money is invested in longer tenured securities compared to liquid funds, are ideal for needs that are 3-4 years away, such as your child's school admissions. Then of course, we have equity funds that invest in equities and are ideal for needs 8-10 or more years away, such as children’s higher education or your retirement.
More the time, more potential to grow. Here’s how
Like all long-term needs, your child’s education too, requires you to start early. Ideally, you should start planning even before the child’s birth so that your investments get more time to grow.
Let’s assume, you plan to save for your child’s higher education after 20 years. Assuming that the current cost of an Engineering degree is Rs 10 lakh, at 10% annual cost escalation, it could become close to Rs 67 lakh when the child is 20. In order to save that much, you will need to invest Rs 1.77 lakh annually or Rs 14,300 per month, in any of the fixed income investments providing 9% interest per annum*.
If these savings figure looks steep, you could consider this method of investing.
Let’s assume that you start a systematic investment plan (SIP) in an equity mutual fund which delivers 10% annual return. Through that, you can reach the same target with a monthly investment of close to Rs. 9,300*.
To sum up, mutual fund investments allow you to enjoy the benefits of long term investing alongside the ease. So while planning for your child’s future, start early, so that you hand over a great financial head start to the child the moment it is born.
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.
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