As a parent of a 6-month-old child, I am currently exploring the most effective way to save for my son's education in the future. My objective is to set aside Rs 10,000 per month for the specific purpose of covering his school fees, which will begin when he reaches 3 or 4 years of age.
My plan entails the following steps:
Regularly saving a fixed amount each month until the time comes to commence paying school fees, which is estimated to be in approximately 3 years.
Utilising this saved fund to cover the annual school fees while continuing to invest the surplus money.
As this fund is designated for my son's education, I aim to steer clear of high-risk investments.
I am in search of an investment opportunity that provides reasonable returns while safeguarding the funds from substantial risks. Given the timeframe involved, I am inclined towards a secure option for the initial 3 years to ensure no withdrawals are necessary during this period.
Reply by Rajani Tandale, Senior Vice President, Mutual Fund at 1 Finance:
With the increasing costs of education, particularly for international studies, it is imperative for parents to proactively strategise. One of the prudent approaches is to consider enrolling in a child plan, which serves as a mechanism to establish a specialised fund for their forthcoming requirements, whether it pertains to education, healthcare, or other critical expenditures.
Commencing this endeavor early enables families to distribute the financial responsibilities across a span of time and foster savings. This route allows them to leverage the benefits of compounding interest and investment progression, thereby markedly augmenting their capacity to address upcoming educational costs.
Since your child’s school fees will begin in 3 years, it’s important to recognize that this is a relatively short investment horizon for higher-risk options like equity mutual funds. Equity investments typically require at least 5–7 years to manage market volatility and deliver wealth creation through compounding.
Conservative Investment Options for Safety
For the initial 3 years, you can explore low-risk options such as:
> Bank Fixed Deposits (FDs): Provide safer and greater stability in returns.
> Debt Mutual Funds: Offer relatively higher returns than FDs but with limited risk.
While these options provide stability and capital protection, they may not generate inflation-beating returns, which is a critical aspect of long-term financial planning.
Wealth Creation Through Equity SIPs
If you’re open to extending your investment horizon, consider starting a Systematic Investment Plan (SIP) in equity mutual funds now. This approach can provide better returns over time, as equities are known to outperform inflation. Here's why:
· Longer Horizon Mitigates Risk: By starting early, you can extend your horizon to at least 5 years or more, reducing the risks associated with equity investments.
· Step-Up SIPs for Growth: Begin with ₹10,000 and increase your investment by 10% annually through a Step-Up SIP. Assuming a conservative return of 12% CAGR, you could accumulate approximately ₹9.8 lakhs over 5 years.
Blended Approach
To balance safety and growth:
· Allocate funds to debt instruments for short-term stability (3 years) to ensure funds are available when school fees start.
· Simultaneously, invest in equity mutual funds through SIPs in large-cap or flexi-cap categories to build a surplus that can continue growing for future educational expenses.
While conservative options provide safety, they often fall short in beating inflation. To ensure financial stability and wealth creation, starting a Step-Up SIP in equity mutual funds alongside conservative investments offers a balanced solution. This approach not only prepares you for immediate educational expenses but also builds a surplus for future needs.