Securing Child'S Future Through Mutual Fund Investment

Securing your child's future through mutual funds

Parents always aspire to provide the best to their children and leave no stones unturned for securing a child's future. From the time of their birth until the children have grown up, the requirements vary according to the different life stages (See chart 1). Parents try to save to the best of their ability to fulfill their requirements. But with the rising cost of living and higher inflation, traditional financial products such as savings bank accounts and fixed deposits may not suffice to generate resources required to meet the goals.

For instance, a professional postgraduate degree costs around Rs 10 lakh now, and this could increase to around Rs 42 lakh in 15 years (assuming 10% inflation). Hence, besides investing in traditional options, parents should look at other investment avenues that will deliver inflation-adjusted returns.

Invest via mutual funds
Mutual funds are an ideal option as these funds invest across the spectrum and provide a wide range of benefits such as liquidity, professional management, tax benefit and diversification. Investors can choose mutual fund categories that suit their respective risk profiles, return expectations and investment horizon (see table 1: Click here). Among the mutual fund categories, pure equity mutual fund categories are suitable for parents with a long-term investment horizon in mind as these funds tend to generate the high returns in the long term despite risks of short term volatility.

Investors with lower inclination towards risk can look at hybrid funds to invest in a suitable combination of primary asset classes (equity and debt). Investors with a shorter investment horizon can look at debt mutual funds across categories based on the time horizon.

Investors can use the systematic feature of mutual funds to achieve their goals:

SIP - Systematic investment plans (SIPs) offered by mutual funds help to stay invested over the long term; you not only gain from the high return potential of equity markets but also ward off risks associated with the asset class. You invest a fixed sum of money at regular intervals. Although the investment goes through multiple market cycles, SIPs help you to reap the benefits through 'Rupee Cost Averaging', i.e., buying more mutual fund units when the net asset value (NAV) is low and buying fewer units when the NAV is high. Also, in most cases, you can fix the SIP amount according to your pocket. This feature is ideal for investors who are planning in the long term for their child and thus can derive the best benefit from equities.

StP - Investors can systematically transfer a fixed amount from one scheme to another at regular intervals through the systematic transfer plan (STP). For example, you can transfer a pre-defined amount on a specified date from a debt investment into an equity scheme; this will not only generate returns on the debt investment but also negate the risk of one-time investment in equity. On the other hand, investors can lock gains from equity funds by transferring the same to short-term debt funds where the returns are less volatile. This is typically done when goal amount is achieved before time or when the goal is near - it reduces the effect of any short term volatility in the equity market on the investor’s portfolio.

SWP - To meet the need for regular child-related expenses, such as education fees, investors can also look at systematic withdrawal plans (SWP) which allow redeeming a specified sum at a pre-determined date by providing instructions to the fund house.

Summing up
To accumulate wealth to secure children’s future and also protect them against uncertainties, parents should not only save regularly but also start investing early.

It is better to look beyond traditional financial instruments - to avenues such as mutual funds and the systematic features offered by them - to generate the best from the underlying investment class. However, note that mutual funds are subjected to risks and hence investors are advised to conduct proper due diligence as well as evaluate their own risk appetite, returns expectation, and investment horizon before investing.

Disclaimer: This article is for information purpose only and not an offer to sell a solicitation to buy any mutual fund units/ securities. These views are not sufficient and should not be used for the development or implementation of any investment strategy. It should not be construed as investment advice to any party. Neither SBI Funds Mgmt nor any person connected with it accepts any liability arising from the use of this information. The recipient should rely on their investigation and take own professional advice.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.