Grow your corpus along with your child via mutual funds
The Covid-19 pandemic-induced lockdown has resulted in families homebound together and parents spending quality time with their kids. An enlightening experience, for many. Take Nisha and Sameer for instance. Staying home with their five-year-old son 24/7 these past few months has been an eye-opener of sorts. They did not know their son’s interest varied from painting, to sports, music, to Lego toys and cooking, which is reflective of the career he might choose. This got them to question the sufficiency of their investments in traditional products. Keeping in mind inflation’s corrosive effect, would they have enough corpus to fund their son’s education and then wedding? It has forced them to comb the investment landscape for products other than traditional favorites. Once such option they have is mutual funds.
Let’s take a look at a hypothetical scenario. Among the various goals for their kid, Nisha and Sameer know that their son’s education and wedding would require maximum spending. They assume the current cost of higher studies and wedding to be Rs 20 lakh and 25 lakh with gestation periods of 12 years and 25 years, respectively.
First off, they need to calculate the future cost of these expenses. As pictured below, the costs would balloon to Rs 42 lakh for education and Rs 1.22 crore for a wedding if we factor in inflation . While the numbers look pretty high, Nisha and Sameer can achieve these by planning their investments well in advance by using options such as systematic investment plan (SIP) in equity mutual funds over the long term.
1Future value is calculated using 6.54% inflation (Average of consumer price index for a period between FY11-20), Source: CSO and CRISIL
Not only will equity mutual funds could allow the couple to achieve their kid’s long-term goal, by investing through SIP, but could also reduce the monthly outflow to Rs 10,655 for higher education and as low as Rs 3,710 for the wedding . Investing smaller amount systematically over a longer period of time could help the money to grow thanks to power of compounding.
An option for every goal
While equity mutual funds an able investment avenue to meet long-term goals – mutual funds invest across the spectrum of asset classes, which makes it easier to invest as per different goals at different life stages. For instance, short-maturity debt funds can meet immediate or short-term requirements such as the child’s tuition or school fees. For medium-term goals, such as paying for hobby classes or buying electronic gadgets, there are longer-maturity debt funds or hybrid mutual funds based on the investor’s risk appetite.
Goal-based mutual funds
2Returns for equity funds assumed at 15% (15-year daily average rolling return of S&P BSE Sensex from inception till August 31, 2020)
'Systematically' meet targets
Mutual funds do not offer just a variety of funds, but also unique features like SIP. As seen in the case study, parents can build the corpus by investing regularly and in a disciplined manner in equity funds via SIP. These can be topped up in sync with rising income across life stages and invested across equity and hybrid schemes.
Nisha and Sameer can also customize their outflows by opting for systematic withdrawal plan (SWP), which will help them withdraw fixed amount at pre-determined intervals and frequencies (monthly, quarterly or annually for, say, school fees). However, evaluation of the tax incidence and exit loads of schemes is vital before choosing SWP. In addition, they can also use systematic transfer plans (STP), to change allocation between different asset classes.
Mutual funds offer several benefits, such as diversification, professional management, liquidity and can be a viable tool for effective financial planning for children. However, since these are market-linked fluctuations in the underlying market or instruments can impact the investmentcorpus. Parents should not fear short-term fluctuations, instead periodically review the portfolio and stay focused on their goals. Lastly, it is vital for parents to inculcate good savings habits in the children and start teaching the concepts of investing, budgeting, and banking early on in life. This would prepare them for future roles and responsibilities. Financial literacy will help the child efficiently use the available resources wisely and lead financially independent lives by taking prudent investment decisions.
Disclaimer: Any comparison/data mentioned in this material is for general information only and not intended to be relied upon as investment advice and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Information and content herein have been provided by CRISIL Research, a Division of CRISIL Limited, and is to be read from an investment awareness and education perspective only. Recipient are advised to seek independent professional advice before making any investments. The views / content expressed herein do not constitute the opinions of SBI Mutual Fund or recommendation of any course of action to be followed by the reader. SBI Mutual Fund / SBI Funds Management Private Limited is not guaranteeing or promising or forecasting any returns.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.