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Building a Child Education scheme using Mutual Funds
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Education for kids is a recurring expense for parents every year.
Mere Planning for one year is not be sufficient.
Preparing a financial plan should cover right from kinder garten to his post graduation and PhD research studies.
So, a proper planning can help us not only secure the education of your kid, it also helps you build corpus for his higher education.
- 1 How much is needed for kids education?
- 2 How to secure funds for the upcoming academic year?
- 3 Fees for the upcoming academic year
- 4 Fees for the academic year two years from now
- 5 Fees for the academic year three to five years from now
- 6 Fees for the academic year five to eight years from now
- 7 Fees for the academic year eight years from now and beyond
- 8 Planning fees for college and higher education
How much is needed for kids education?
The first step in planning for Kids education needs is by determining how much corpus is necessary.
Start using Excel and determine how much you money is needed, per year, starting from the next academic year.
You need to prepare a plan till his Engineering / Medicine or probably for PG/US education as well.
So, your Excel sheet should tell us how much corpus you have to build and how much funds you need per year.
How to secure funds for the upcoming academic year?
School admissions begin in May every year in India.
For the sake of easy understanding, let us take the example of my kid who will get admitted in Ist Standard in May.
So, the first step is to secure funds for admissions for the upcoming May.
Once this is secured, the focus will be to secure fees for the IInd Standard right from now.
Once the IInd Standard fees is secured, the focus will be to invest and save for for his IIIrd Standard fees and beyond.
Fees for the upcoming academic year
Now let us come to practical details of this planning.
The next academic year will be in less than 1-year time.
Since the duration is a short one, we cannot risk investing in equity mutual funds.
So, our choice is to invest in debt mutual funds.
The best schemes for this requirement are Short term debt funds.
Find a good Short term debt funds which has no exit load from https://www.valueresearchonline.com/funds/fundSelector/default.asp?exc=susp%2Cclose&cat=3
Fees for the academic year two years from now
Two years is a good time available for us to invest in.
To secure fees for the academic year two years from now, invest in a debt-oriented hybrid scheme
Select a good scheme from https://www.valueresearchonline.com/funds/fundSelector/default.asp?cat=24&exc=susp%2Creg%2Cclose
Fees for the academic year three to five years from now
To secure fees for the academic year three to five years from now, invest in a equity-oriented hybrid scheme
Select a good scheme from https://www.valueresearchonline.com/funds/fundSelector/default.asp?cat=23&exc=susp%2Creg%2Cclose
Fees for the academic year five to eight years from now
To secure fees for the academic year five to eight years from now, invest in a multi-cap equity scheme
Select a good scheme from https://www.valueresearchonline.com/funds/fundSelector/default.asp?cat=9&exc=susp%2Creg%2Cclose
Fees for the academic year eight years from now and beyond
To secure fees for the academic year eight years from now and beyond, invest in a mid-cap equity scheme
Select a good scheme from https://www.valueresearchonline.com/funds/fundSelector/default.asp?cat=10&exc=susp%2Creg%2Cclose
Planning fees for college and higher education
I prefer a self-built balanced fund with high exposure to mid/small cap in the initial days and then tilt towards diversified funds and finally to debt funds as the child goal approaches.
Assume i have a new born baby or a 5 year old kid
I am planning to build a corpus for Engineering or Medicine
I will assume a time frame of 15 years
And a corpus of say 75 Lakhs
PS: I am taking very rough and casual numbers that are coming to my mind. U need to be more careful in calculations with real data
I will assume a 15% CAGR
Use a SIP calculator
So i need to SIP @ 11k per month for a period of 15 years with an estimated growth of 15% pa
I start with a SIP in Microcap fund for say 6 years
This is the high risk high growth rate period.
Then switch the microcap funds + continue the monthly SIP amount to a mid/small cap fund for 3 years. Completes 9 years by here
Then the whole corpus is switched to a diversified eq fund for 3 years. Completes 12 years by here
Finally, in the last 3 years (ie. 12th year or so), the whole of the fund is secured into a medium term debt fund
All switches and corpus till the 12th year will be tax free coz of long term capital gains
This is a plan which appears simple to tell but an investor needs to be disciplined and focussed and need to take timely switch decisions ignoring market conditions.
The underlying idea behind the concept is to start with high risk schemes (small/microcaps) so as to get maximum growth and progressively shift towards low risk schemes (diversified equity and debt) and the child grows and reachs towards her goal.
Start the first 6 year period SIP. Pick two small / microcap to start with. Divide your SIP money equally into the two schemes.
May be: DSPBR Microcap Fund and Franklin India Smaller Companies Fund
Investor on your own. No brokers required. Go for Direct Plan - Growth option.
If you already invested in DSPBR or Franklin MF fund house for some other financial goal, consider Reliance Smallcap Fund.
The overlap between DSPBR Microcap Fund and Reliance Smallcap Fund will be even more lesser (13%).
Pick SIP date for DSPBR Microcap Fund between Date 1 to 15 of every month
Pick SIP date for Franklin India Smaller Companies Fund between Date 16 to 28 of every month
Stay invested for the whole period. The market goes up and down. Microcap funds often are choppy. Do not be scared even when it is like 20 to 30% down. Being invest for the whole period is important to reap in the best possible returns.
Because we are using two schemes, periodically check if there is an overlap of shares of the two schemes.
In this case the overlap is 16% which is okay. Consider replacing one of the scheme if it is more than 20 or 25%
The overlap tool can be check once a year.
How much will be growth rate of various asset classes?
Considering market data in the past 5 years, the growth rate of various schemes is as follows:
Smallcaps: 26% Midcaps: 21% Multicaps / Diversifed equities: 16% Largecaps: 13%
Long term debt funds: 10% Short term debt funds: 9%
So, we are basically moving from 26% to 9% regime as we progess.