Building a Child Education scheme using Mutual Funds

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Education for kids is a recurring expense for every year. So planning for one year will not be sufficient. Start by determining how much you need for May next year, and the next and so on. You need to prepare a plan till his Engineering / Medicine or probably for PG/US education as well. Start determining how much you need annually.

Planning for Engineering / Medicine college fees

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

http://sipcalculator.in

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%).

Date diversify

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

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.

Check Overlap

Because we are using two schemes, periodically check if there is an overlap of shares of the two schemes.

Use http://fundpicker.thefundoo.com/Tools/PortfolioOverlap

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.