Should I invest in education plans to secure my child's future despite existing expenses?

Ans: Your desire to secure your child's future through planned investments is commendable. Balancing EMIs with regular investments for educational goals requires a thoughtful approach. Here’s a structured plan that aligns with your current financial obligations and allows for periodic returns, ensuring both growth and liquidity over time.

1. Step-Up SIPs for Systematic Growth
Since you prefer periodic returns, systematic investment plans (SIPs) are a suitable choice. SIPs in actively managed mutual funds offer flexibility, periodic liquidity, and potential for high returns.

Periodic returns with growth: SIPs are versatile, providing monthly investments without straining your finances.

Option to step up investments: Gradually increasing your SIP contributions, even by 10%, can compound returns significantly.

Active funds with proven performance and expert fund managers can better support education goals than index funds. An index fund may not always adapt to market changes or outperform inflation, especially over the long term.

2. Opting for Regular Funds for Advisory Support
Direct mutual funds might appear to have cost advantages, but investing through a CFP via regular funds has notable benefits. Here’s why:

Access to expert advice: A Certified Financial Planner (CFP) can guide you on fund selection and adjustments.

Portfolio management: Regular funds offer support in monitoring and rebalancing, which can be essential for achieving educational goals.

Direct funds lack this advisory support, which could make it challenging to manage the plan amidst market changes.

3. Balanced Hybrid Funds for Stability and Growth
Hybrid mutual funds blend equity and debt assets, offering a stable and growth-oriented investment option for education savings.

Periodic income potential: Hybrid funds distribute dividends regularly, making them ideal for periodic returns.

Lower volatility: The mix of asset classes cushions your portfolio, reducing risk exposure while maintaining growth.

Hybrid funds can balance between safety and returns, offering the flexibility to meet educational expenses as needed.

4. Child Education-Specific Funds for Goal-Oriented Investing
Child education funds, available in mutual funds, are tailored for goal-based investing with a long-term horizon.

Disciplined investing: These funds come with a lock-in period, helping you stay committed to the education goal.

Balanced portfolio: They often maintain a well-diversified portfolio with both equity and debt exposure for stable growth.

These funds are designed for the future, ensuring that your child’s education funds grow in a structured way.

5. Debt Funds for Safety and Liquidity
Debt funds are a safe choice for those with existing financial obligations, like an EMI. They offer a lower-risk option with moderate returns.

Flexibility and easy access: Debt funds allow withdrawals without lock-in periods, providing liquidity for emergencies.

Short- to medium-term goals: Debt funds work well for goals with a shorter horizon, ideal if you foresee educational expenses within five years.

Debt funds help maintain stability in your portfolio, balancing higher-risk assets with safer options.

6. Public Provident Fund (PPF) for Safe, Long-Term Growth
PPF is a government-backed scheme providing guaranteed returns with tax benefits, making it a stable addition for educational savings.

Secure and long-term: The 15-year term matches well with future education goals and provides tax-free returns.

Risk-free investment: It’s a low-risk asset and serves as a buffer in your investment portfolio, especially valuable during volatile market conditions.

PPF contributions ensure both security and a guaranteed return, suitable for education-related goals.

7. Build an Emergency Fund for Security
Before starting major investments, ensure you have a stable emergency fund to handle unforeseen expenses. This can prevent disruptions in your education savings.

Cover 6-12 months of expenses: Your emergency fund should cover household expenses, EMI, and basic needs.

Use liquid funds: Park your emergency funds in liquid funds for easy access and some returns.

An emergency fund prevents you from drawing on education savings, allowing them to grow uninterrupted.

8. Periodic Portfolio Review for Alignment with Goals
Regularly reviewing your portfolio will keep your investments aligned with changing market conditions and personal goals.

Conduct reviews every 6-12 months: Assess fund performance and make adjustments as needed with your CFP’s help.

Consider rebalancing: Move funds across asset classes to maintain the optimal balance based on market trends.

Reevaluating your portfolio ensures your investments remain on track, securing your child’s education fund.

9. Tax Efficiency for Maximizing Returns
Managing your investments tax-efficiently enhances net returns, giving you more value for your efforts.

Invest in tax-saving funds: Certain funds qualify for Section 80C deductions, providing tax relief and growth.

Stay updated on tax rules: Note the latest mutual fund capital gains tax rates – long-term gains over Rs 1.25 lakh attract a 12.5% tax, while short-term gains are taxed at 20%.

Tax-efficient investing ensures more of your returns go towards educational needs rather than tax outflows.

10. Education SIP and Flexi SIP Options
Some mutual funds offer an “Education SIP” or “Flexi SIP” that can be paused or adjusted based on your financial situation.

Flexible contributions: Flexi SIPs allow you to increase or decrease contributions, ideal for periods of higher or lower income.

Tailored for educational goals: These plans are structured with education goals in mind, providing liquidity and growth in one solution.

Such SIP options give you control over your investments, allowing you to adapt to changing needs.

11. Final Insights
Your plan to invest for your child’s education shows foresight. While balancing EMIs, start with manageable SIPs, aiming to step up as finances allow. Actively managed mutual funds, hybrid funds, and PPF can secure both growth and stability for educational needs. Revisit your portfolio annually with your CFP, staying updated on tax rules and fund performance to optimize your investments. A systematic approach will ensure you meet future education costs comfortably.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

https://www.youtube.com/@HolisticInvestment