Mutual Funds: How to ensure your child’s financial future?

Raising children is a significant responsibility and a top priority for parents. Providing a high quality of life, instilling strong values, and ensuring a good education are essential for nurturing a happy and well-rounded child. Though it requires continuous balance, the investment made today will greatly influence their future. This underscores the importance of beginning investments early in life to leverage the compounding power that comes with a longer investment horizon.

Higher education in India, particularly for esteemed institutions or specialized fields, can be significantly costly. That’s why planning and preparation should ideally start from the child’s early years or even before conception.

Using PPF for children’s education corpus

Parents often exercise extra caution when saving for their children’s education. This caution often leads them to opt for safer investment options, even if they offer lower returns. Many opt for the Public Provident Fund (PPF) as a common investment choice. Investing in this option allows them to benefit from tax advantages under Section 80C of the Income Tax Act, 1961.

If both the husband and wife are employed and maintain their own PPF accounts, investing ₹1,50,000 each year for 15 consecutive years may not build a massive corpus, but it can be substantial enough to support their child’s early years of education.

Investing in large-cap funds to pay for children’s education

Parents can consider an alternative approach to investing for their children’s education. One option is to invest in large-cap mutual funds, which offer potentially high returns with lower risks compared to mid-cap, small-cap, or thematic funds.

Beginners in the stock market frequently wonder about the effectiveness of investing in large-cap funds. Large-cap funds primarily invest in well-established companies with higher market capitalizations. These companies are typically more financially stable and their stock prices tend to be less volatile. As a result, investing in large-cap funds generally offers a lower risk profile for your investment.

Unlike the PPF, which offers guaranteed returns, large-cap funds do not promise such assurances. However, they have a track record of delivering consistent and stable returns over the long term. This is attributed to the stability and established performance of the large companies they typically invest in.

The table below demonstrates the potential accumulation for children’s education if parents invest ₹10,000 every month through systematic investment plans (SIPs) in a large-cap fund over 15 years.

Critics of using mutual funds to finance children's education often highlight concerns about market volatility potentially reducing returns. However, historical data shows that even the least performing large-cap funds have generated returns exceeding 12% in the long term. This suggests that parents can build a substantial corpus to fund their children's higher education.

Certainly, there are solution-oriented funds designed specifically for this purpose, but their modest returns have not significantly aided parents in achieving their financial goals, such as accumulating funds for their children's higher education.