This article was published on moneycontrol.com on May 18,2015.
We have all grown up hearing our parents say that their biggest goals in life were to build sufficient corpus for our education and marriage and also to lead a financially independent life in their post-retirement days. Thirty years later, the long term financial goals of a couple in their late twenties are on the same lines. The difference here is that while our parents depended solely on fixed deposits, PPF, EPF and physical gold to meet these goals, we on the other hand have a variety of options at our disposal. However even today, a majority of the investors still follow in their parents footsteps when it comes to planning for their goals. As I write this column, there are data points to indicate that as early as 2013-14, more than 55% of the financial savings of the household sector is being allocated into fixed deposits.
My endeavor in this column is to show investors how mutual funds, whose place in the financial savings of households is a meager 1.8% (2013-14), can be effectively used to achieve one of their long term goals i.e. children's education.
The rising cost of education has become one of the biggest nightmares for parents. Today, the cost of nursery education for a toddler can be in the range of INR 60,000 to INR 3 Lakh annually. In such a scenario, the parents are looking at a college spend that is beyond their imagination. Considering that education costs are increasing at more than 20% per annum, parents need to invest into instruments which will yield the expected returns. Equities are the best option available as they are known to create wealth in the long term. However, given the volatile nature of this asset class, investors would be better off participating in the markets via the mutual funds route. The biggest advantages of investing into mutual funds are that they are managed by professionals who have the expertise in cherry picking stocks and they are also highly diversified across stocks and sectors.
These advantages should be viewed along with the caveat that mutual funds are also subject to volatility.
In the mutual funds space, parents can either create a portfolio exclusively for the purpose of funding their children's education or specifically invest into children's plans offered by funds houses.
While creating a portfolio for their children, parents should follow these guidelines:Open a minor account
Make use of the SIP route for all investments
If the college enrollment of the child is less than 5 years away, the portfolio should consist of debt and balanced funds
If the college education is more than 5 years away, an aggressive portfolio consisting of equity funds and one balanced fund will be ideal. A balanced fund is suggested in this portfolio so as to get a flavor of fixed income
Review the portfolio on a yearly basis. However, if any of the funds have been underperforming for a year, there is no need to press the panic button. If the underperformance continues for 3 years, then the SIP in the fund can be terminated
Two years before the college education, the entire surplus accumulated in the equity and balanced funds should be moved into debt funds
Finally, every year there should be an increase in the amount invested via the SIP route. If the portfolio has 9 to 10 good funds, the increased amount can be allocated among the existing funds.
Below table is a portfolio which has been designed for my son's education in a minor account. The first investment was started in 2013 and as there are more than 10 years for his college education, an aggressive portfolio has been designed for him.
These funds have been selected on the basis of quantitative and qualitative parameters decided internally. The funds along with the returns have been shown here. However, investors need to remember that past performance should not be the only criterion while selecting funds.
Table1: An ideal portfolio created for a child who has more than 10 years to start college education.
|5 yr CAGR
||10 yr CAGR
|Birla Sun Life Frontline Equity Fund (G)
|UTI-Opportunities Fund (G)*
|IDFC Premier Equity Fund (G)*
|SBI Emerging Businesses Fund (G)
|ICICI Prudential Value Discovery Fund (G)
|HDFC Mid-Cap Opportunities Fund (G)*
|Reliance Small Cap Fund (G)*
|Reliance Banking Fund - (G)
|HDFC Prudence Fund - (G)
*As the funds have not been in existence for 10 years, we have taken the since- inception returns.
Returns are as on May 8,2015.
Note: Some funds in this portfolio have moved out from our recommended funds list. However, the SIPs into the same continue as before.
For parents who do not wish to create an exclusive portfolio for their children, fund houses have an alternative in terms of children's plans. They have been designed in such a way that parents can decide on the different options depending on their investment horizon.
Table 2: Best Children's Plans available in the industry
|5 yr CAGR
||10 yr CAGR
|HDFC Children's Gift Fund-Investment Plan (Equity Oriented)
|HDFC Children's Gift Fund-Savings Plan (Debt Oriented)
|ICICI Prudential Child Care Plan-Gift Plan (Equity Oriented)
|ICICI Prudential Child Care Plan-Study Plan
The corpus of these funds is a clear indication that the child specific plans are very small in size when compared to some of the bigger funds from the same fund houses. This means that there is not enough awareness about these funds among investors. We are living in an age where parents are saving for children's education by investing into child plans offered by insurance companies. If fund houses can create awareness about the plans available with them and improve performance, it is only a matter of time before we see parents flocking to invest into children's plans offered by the mutual fund industry.
Parents, it is high time that you make provision for your children's education and start investing for the same. From the mutual fund industry you can consider either of the two options mentioned above.
Fund Houses, if your children's plans can mirror the superlative performance of some of your best performing funds, parents will be more than happy to entrust you with their hard earned surplus.