Why do you need to invest in Mutual Funds for
your child’s higher education?
Childhood
is a carefree zone one if not all then most would love to go back to for
worries were few and joys many. Children can be an erratic lot, from wanting to
be a doctor one day to a lawyer another. Their dreams vary and can be erratic,
the pertinent question that needs to be addressed though is can you afford to
be erratic with their dreams and future.
Parents often assume that when the time arrives, they would have the sufficient corpus necessary to fund their child's education but in the process tend to not account for the following factors:
Parents often assume that when the time arrives, they would have the sufficient corpus necessary to fund their child's education but in the process tend to not account for the following factors:
a) Inflation
b) In cases of higher education abroad then exchange rate fluctuations, accommodation and travel fare
c) Whether the parents have accounted for a retirement corpus
From 2008 to 2018, education fees have risen by
a)150 % for school and tuition
b)175 % for private schools
c)96 % for technical courses
Source : The Value of Education Learning of Life published in 2015 by HSBC
Holdings Plc
Now let's imagine that a parent on the basis of fees
of 2008, decided that he currently had 15 Lakhs needed for his/her child's
higher education needed in 2018, it's clear inflation would have caused an
increase in fees thereby creating a need to look elsewhere for the difference
cause by inflation.
What happens when parents
do not plan their child's education fund?
b) They give up on leisure
time since they feel they have to work harder which ergo affects their health again
When you fail to plan,
you plan to fail. Parents often then tend to take a loan which takes a toll on
their health as explained above but along with that forget that therefore they
do not plan for their own retirement and ergo are dependent on their children.
When should you invest?
As soon as the child is
born, we are not kidding (no pun intended). Imagine having an 18 year time
horizon, you have the luxury to invest for and stay invested for such a long
time which therefore gives you enough ammunition to fight off inflation and
volatility.
What is child mutual
fund?
When it comes to Mutual
Funds, always keep in mind that any fund that claims to specific targets like
Retirement and your Child’s Future are just branded the way they are to touch
that emotional chord within you.
Mutual Funds offering
specific children related plans have often been the source of harsh criticism
from the advisor community as well as by revered minds in the financial world.
The biggest and obvious
criticism has been attributed to poor returns.
Let’s find out whether
the criticisms are justified.
As can be seen from the
above image, except for the year of 2009, there isn't much to differentiate
between the two funds.
As can be seen from both
the images, there isn't much difference when it comes to the portfolio
bifurcation of these two funds also.
One of the major reasons for looking at equities to fund your child’s future education is to avail the inflation beating potential that equities possess. This then begs the question, why are you invested in a fund that by regulation requires a minimum allocation towards debt?
Why is there so much similarity between the HDFC Hybrid Fund and
HDFC Children’s Fund?
The reason for this is
that both HDFC Hybrid Fund and HDFC Children’s Fund are Hybrid Aggressive
Funds.
So basically when you are
investing in a Children’s Fund, you are actually investing in a Hybrid
Aggressive Fund that is branded as a Children’s Fund.
Besides the obvious
marketing gimmick of luring parents with a product that promises to cater to
future goals of the children, there is no advantageous position a Children
specific fund has over Hybrid Aggressive Funds.
So clearly the criticisms
directed towards Children Specific Mutual Funds are not only harsh but also
unwarranted since the portfolio allocation is in line with what a Hybrid
Aggressive Fund should be and as previously mentioned, Children Specific Mutual
Funds are basically Hybrid Aggressive Funds.
If a particular fund has not performed as per the expectations of the forecaster when in fact its returns are in line with its benchmark, then has the fund underperformed or has the forecaster got it wrong?
Scheme
|
Category
|
Aditya Birla Sun Life Bal Bhavisya Yojana- Wealth Plan
|
Hybrid-Aggressive
|
Axis Children's Gift Plan
|
Hybrid- Balanced Hybrid
|
HDFC Children's Gift Plan
|
Hybrid-Aggressive
|
Tata Young Citizens Fund
|
Hybrid- Balanced Hybrid
|
Source: Respective Factsheets
The next time you are
about to pick a Child Specific Mutual Fund, make sure you check the category.
If the returns are in
tune with the benchmark but still not where you want it to be, keep in mind
this was poor planning on your part and not the fund. Your expectations have to
be realistic with regards to the category as well as your goal.
How do I plan for my child’s education fund?
As mentioned at the very
beginning of the article, when you are envisaging the future education expenses
of your child, it should consist not only the course fees but should also
account for
The fees of today will
not be the same in 10 years’ time, inflation will make sure of that.
Since you have a longer
time horizon (close to 10 years or more is advisable), you can afford to have
your portfolio tilted slightly towards moderately schemes with aggressive
schemes making up your satellite portfolio.
Points to keep in mind
b)Do not get greedy with your investments, if you reach your goal before the desired time, do not stick around at a market high expecting the markets to go even higher.
c)Always make sure you keep a year or two spare since you do not want to redeem when during a market slump.
d)As and when you are in surplus cash, make sure to add that to your portfolio to ease some of your worries to the existing SIP’s.
