Beat Escalating Education Costs Through Mutual Fund Children Plans

Children education cost is skyrocketing with each passing year, making the effectiveness of traditional products like fixed deposits highly questionable in the current scenario. Equities stand out of all options as a means to achieve children education goal.

Getting to reality

Before jumping to any ad-hoc number, it is imperative to note down three key numbers that are vital to your child’s education goal. 

1. Corpus needed
2. Number of years left until your child’s education begins
3. Expected rate of return

As said earlier, it is highly critical that you set the above three numbers right or else the whole process of education planning will turn futile. 

Let’s assume that the current cost of education in India at 18 years of age is Rs 20,00,000. The same is expected to grow to Rs 70 Lakh (rounded) after factoring in inflation at 7%. The following table illustrates the monthly SIP amount required to attain the required sum at varying rate of return and number of years.  

	Number of Years Until The Education Begins
Expected Rate of Return	10	15	20
10%	₹ 34,961.98	₹ 17,518.71	₹ 9,706.97
12%	₹ 31,516.76	₹ 14,828.81	₹ 7,668.33
15%	₹ 17,862.50	₹ 5,863.18	₹ 2,043.68

As apparent, the amount of SIP per month reduces vastly when there are enough number of years in your hand and the returns generated are higher. Thus, it is important to start investing earlier to lessen the burden of monthly outflows. 

How to move ahead with your plan?

The next obvious question is how to select a viable route to invest in equities. In the given condition, mutual fund plans offer themselves as the best investment alternative. Investment in mutual funds can be done in two ways.

Equity-oriented schemes- You can start a SIP into one or two equity-oriented schemes and earmark it towards your child’s education. However, you will have to periodically evaluate the performance of these schemes to know whether SIP should be continued or not in the said scheme. A scheme underperforming for more than three years should be immediately discarded and replaced with a well-performing scheme. 

Mutual fund children plans - Many fund houses offer child plans that are basically hybrid schemes with a mix of debt and equity instruments. These schemes allow parents to invest on behalf of their minor child. These schemes stipulate a condition that the redemption proceeds are credited only in beneficiary kid’s bank account.

Here is a snapshot of some of the child plans offered by various mutual fund houses along with their performance so far. 

Scheme Name	Inception Date	1-Year Return	3-Year Return	5-Year Return	10- Year Return
HDFC Childrens Gift Fund - Investment Plan	March 02, 2001	15.59	13.37	18.10	14.13
HDFC Childrens Gift Fund - Savings Plan	Jan 01, 2013	7.70	10.93	NA	NA
SBI Magnum Children’s Benefit Plan	Jan 25, 2002	15.90	15.11	14.42	10.98
ICICI Prudential Child Care Plan - Study Plan	Aug 31, 2001	10.07	12.39	15.38	12.28

Exit load under these schemes is as high as 3% within the first year of redemption. This discourages parents to withdraw from corpus prematurely and help it stay intact till the intended goal nears.

Another benefit associated with these plans is that they connect emotionally with parents than a regular equity-oriented scheme. It is more likely for parents to continue investments in these schemes even during rough financial phases just because of emotional quotient. Hence, there are higher chances of disciplined investing in these schemes. 

About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. She is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging. 

Should You Always Invest In Five-Star Rated Funds?

The craze for five-star rated mutual fund schemes is growing rapidly among investors. Many believe that choosing only five-star rated schemes will ensure outperformance of their portfolio. But, there is more to this than meets the eye. 

Fact # 1 - Ratings are not permanent - Don’t be misled by the belief that five-star ratings are permanent. Ratings can change within no matter of time if schemes fail to hold on to their exemplary performance. This means that a five-star rating can easily be downgraded to three-star or four-star in an event of declining performance and thus, relying just on this parameter is counterproductive. 

Fact # 2 - Category-specific ratings - Ratings are assigned as per the category of the mutual fund scheme. For example, there will be a separate set of ratings for equity-diversified schemes and another set for tax-savings schemes and so forth. A scheme is rated five-star among its category even it that category as a whole is not putting a good show. For example, an infrastructure based (sectoral specific) scheme might be assigned five-star even if its performance is lagging behind an equivalent rated equity-diversified scheme. So, it's equally important to know what category you are investing in rather than rushing to pick up just five-star rated funds. 

Fact # 3 - Past performance - Five-star rated status is highly dependent on a scheme’s past performance. As Mutual fund disclaimer points out “Past performance is not indicative of future returns”, therefore, it is not wise to invest mainly on the rating criteria. Also, five-star rated funds have less scope to maintain their rankings compared to three or four-star rated funds, which have the scope to improve and rise. 

Look for methodology

Not all rating agencies assign the same rating to a scheme due to the difference of methodology adopted to rate it. Hence, it is wise to look for the rating parameters used by rating agencies to circle a scheme. In general, consistency of returns and degree of risk should be compared to filter the relevant schemes. 

Is rating useful at all?

Given the several hidden factors associated with rated funds, it is essential to understand if an investor should pay heed to rating statuses at all. The answer is not explicitly ‘No’ as it will not be fair to throw this parameter out while evaluating schemes. 

Ratings do matter in decision making but not entirely. It is recommended to choose between three to five-star rated schemes while keeping an eye on important factors like expense ratio, fund-size, category etc. Also, it is important to analyze a scheme’s performance over a period of time like 1, 3, 5, 10 years to understand the consistency of returns over both short and long-term horizons.

About The Author: Reenika Avasthi is associated with Inverika Investment Solutions LLP as a Content Writer and Financial Planner. She is a Certified Financial Planner and a freelance content writer in the field of personal finance. Her interest in writing and spreading investor awareness motivated her to start blogging.