Mutual fund investment strategy for kid’s education

A goal without a plan is just a wish – Antoine de Saint – Exupery

 This is the third and final part of our series on how to fund kid’s education. In our first article, we got an idea about the cost of higher education at different type of institute in India and abroad (Plan for kid’s education- How much will it cost?).  The table below gives us an idea about what should be our financial goal for our kid’s education.

Once we got an idea about the cost, in our next article, we discussed what are the options available ( Planning for kid’s education- go mutual fund way!). After considering pro and cons of the available options, in our limited opinion, we think mutual funds are the best option available for investing for kid’s education.

Investing for kid’s education – Focus on asset allocation

Asset allocation is the main driver of returns and suitable asset allocation is the key to meet our financial goal. If we want to go from New Delhi to London, we go by air. If we go from New Delhi to Gurgaon, our choice of transport is different. Without going into much technical details:

  • Longer the investment time horizon, higher should be the allocation to equity
  • Lower the risk tolerance (ability to withstand fluctuation in portfolio value), lower should be equity allocation
  • Asset allocation will not be static but will need to be changed periodically to changes in the above two factors.

The below table should give an idea about what could be the desired asset allocation.

Kid's education -Asset allocation
Kid’s education -Asset allocation

What return to expect from our investments?

 In the above table, we showed how the asset allocation should change. As asset allocation changes, return expectations also change. So, if someone is investing for 8 years, he/she will have to reduce equity allocation and as a result expected return from around 12% will fall. In the chart below, we show what return expectations, based on above asset allocation, should be used to our calculations:

Kid's education What return to expect?
What return to expect?

How much money will be needed for education?

Now, if you need 10 lacs rupees today and it is rising at 6% every year, how much you will need at the time of your kid’s education. In the below chart we show this. So, if the college fee is 10 lacs today and your kid will go to the college after 15 years, you will need around 24 lacs at that time.

How much money will be needed for kid's education
How much money will be needed for kid’s education

How much money needs to be invested every month?

In the chart below, we show the SIP amount needed if you want to invest for your kid’s education. So, if your kid were to go to college (current fee is 10 lacs) after 15 years, the corpus needed will be 24 lacs (above chart below). Now your SIP will earn an average return of 11.6%. So, to reach a corpus of 24 lacs, in 15 years, you will need to invest 5189 rupees every month.

SIP amount for Kid's education
SIP amount for Kid’s education

Finally, investing for kid’s education is a great responsibility. In involves three steps:

  • The first step is to fix the goal in terms of how much money will be needed and when will that money be needed. In doing so, don’t forget to take inflation into consideration.
  • Once, the goal is fixed, we need to think about asset allocation. Longer the investment horizon, higher should be equity allocation.
  • Choose appropriate mutual fund and start investing systematically. Remember, if you have time on your hand, even small amount per month will be able to fulfil your dream of quality education for your kid.

Disclaimer: The above content is just for information and should not be construed as an offer to buy or sell or recommendation. Contact your financial advisor for guidance on any investment related query.

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