Planning for your childs future with mutual fund SIPs

Summer vacations in most schools are now over and children will soon begin a new academic year. Every parent wants the best possible education for their child. With rapidly rising cost of higher education and intensifying competition, parents must start planning early for their children’s future. In this blog post, we will discuss how disciplined investing through mutual fund SIPs can help you meet the aspirations for your children.

The challenge

• Cost of higher education in India has been increasing at a CAGR of 10 – 12% (source: ET Money, November 2020). This is considerably higher than the average CPI inflation.


• Cost of under-graduate engineering education in popular private engineering colleges can range from Rs 10 – 15 lakhs (source: Shiksha.com). If your child is 5 years old today and you want to plan for his / her engineering education, then you should plan to have a corpus of Rs 35 – 50 lakhs by the time he / she is ready to go to college (assuming inflation of 10%).


• Cost of medical education in private institutions can range from Rs 20 – 40 lakhs (source: Shiksha.com). If your child is 5 years old today and you want to plan for his / her medical education in a private college, then you should plan to have a corpus of Rs 70 lakhs – 1.4 crores by the time he / she is ready to go to medical college (assuming inflation of 10%).


• Cost of full time MBA in private institutions can range from Rs 15 – 20 lakhs (source: Shiksha.com). If you want to plan your child’s future MBA education we need to accumulate a substantial amount to fulfil your child’ educational aspirations.

The challenge is significant and you need to have a plan to fulfil the aspirations you have for your children.

Start early

Let us assume that you need Rs 20 lakhs at today’s prices for your child’s higher education (when your child turns 18). Suppose cost of higher education will grow at 10% CAGR. The table below shows how much you need to save and invest on a monthly basis to reach your goal depending on when you start investing (assuming 10% CAGR return on investments).

You can use this tool to calculate the future value - https://www.advisorkhoj.com/tools-and-calculators/compounding-calculator

You can see that with an early start you can reach your goal with smaller monthly savings – this is power of compounding. You should start early in your financial planning for your child to get the benefits of power of compounding.

Disclaimer: This example is purely illustrative and should not be construed as financial advice. Consult with your financial advisor to plan according to your needs.

Remain disciplined or you may fall short of your goals -

If you are not disciplined in your investments e.g. stopyour SIP, withdraw funds from the investmentprematurely for some other purposethen you will lose the benefits of compounding and fall short of your goal. Let us understand this with a help of a few examples. Three investors Mr A, B and C have been saving and investing Rs 25,000/month through SIP with the purpose of accumulating Rs 50 lakhs when their children turn 18 (in about 10 years). Each investor behaves differently over the course of their respective investment tenures.

• Investor A redeems Rs 10 lakhs at the beginning of the 5^th year but continues his SIP for 10 years


• Investor B stops his SIP in the 5^th year and re-starts it in the 7^th year till 10th year


• Investors C remains disciplined and continues his SIP for 10 years

Let us see how much each investor would have accumulated at the end of 10 years assuming 10% CAGR return on investment (please see the table below). You can see that lack of discipline can cause a lot of harm to your financial interests. For a priority, as important as your child’s education, you should always remain disciplined in your investments.

Suggested reading - https://www.advisorkhoj.com/hsbcmf/what-is-goal-based-financial-planning

All figures are in Rs lakhs

Disclaimer: This example is purely illustrative and should not be construed as financial advice. Consult with your financial advisor to plan according to your needs..

Putting investments for your child in a general purpose fund from which you withdraw from time to time for various needs can lead to indiscipline with regards to the financial goals for your child.

Having a separate investment for your child will build an emotional connect and help you remain disciplined in your investments for your child’s future. For the sake of their children, parents will also be ready to cut discretionary spending on other items to save and invest more for their children.

Reading this article mayhelp you know more about SIPs - https://www.advisorkhoj.com/hsbcmf/maximize-your-sip-returns-in-volatile-markets

Conclusion

Children’s future is the most important priority of any parent. In order to ensure success of your children’s aspirations, you should have a plan and remain committed to it. Mutual fund SIPs are ideal investment options for long term goal planning. The earlier you start investing through mutual SIPs the more you can benefit from the power of compounding.

By starting an SIP in your child’s name you can strengthen your commitment towards a bright future for your child. You should always invest according to your risk appetite and investment horizon. You are advised to consult your financial advisor about how you can start planning for your children’s education.

You may like to read an infographic on - plan for your child's future with SIPs

Issued as an investor education initiative by HSBC Mutual Fund.