Investing for Child Education: Diversify or Increase Retirement SIPs?

Ans: You have clearly defined two long-term goals: child education (18 years) and retirement (28 years). Both require disciplined planning and focused execution. Your question reflects your thoughtful approach to investing, and this is commendable.

Let’s assess whether using the same funds for both goals or selecting a new set of funds is the better strategy.

Advantages of Increasing SIP Amounts in Existing Retirement Funds
Established Performance: You have chosen five good funds for retirement. They likely have a strong track record and align with your goals.

Simplified Portfolio Management: Managing fewer funds reduces complexity and ensures easier tracking and review.

Cost Efficiency: Adding to the existing funds avoids transaction costs, exit loads, or other fees.

Consistency in Investment Strategy: It avoids the risk of over-diversification, which can dilute returns.

However, it is essential to ensure that your existing funds are diversified across asset classes, sectors, and geographies. This ensures they can cater to both goals.

When to Choose a Separate Set of Funds
Different Risk Profiles: Child education and retirement goals have different timelines. For child education (18 years), equity exposure can be high initially and reduced later. For retirement (28 years), you can stay invested in equity for longer. A separate strategy for each goal ensures alignment with these timelines.

Better Focus on Specific Goals: Having dedicated funds ensures that your child’s education and retirement planning are not mixed up. This avoids the temptation to dip into one goal's corpus to fulfill another.

Flexibility in Portfolio Allocation: Separate funds for education allow you to use balanced or hybrid funds in later years, ensuring stability as the goal nears. Retirement funds can remain equity-focused for longer.

Evaluating Your Current Situation
If your existing five funds are diversified and have a proven track record, you can consider increasing SIP amounts to fulfill both goals.

If the current funds are heavily equity-oriented, you may add a balanced or hybrid fund specifically for the child’s education. These funds provide stability as the education goal approaches.

Suggested Approach
Split Your Investment: Allocate a portion of your SIP to existing funds and use another portion to create a separate portfolio for your child’s education.

Asset Allocation for Education: For the first 12-15 years, focus on equity funds. Shift gradually to balanced funds or debt-oriented funds in the final 3-5 years.

Portfolio Review: Review both sets of investments every year. Ensure they align with the timelines and adjust the allocation as needed.

Key Recommendations
Diversification is critical. If all your current funds are in one category, explore other categories.

Avoid over-diversification by limiting your total funds to 6-8 across both goals.

Stick to investing through a Certified Financial Planner (CFP). Their guidance ensures better fund selection and monitoring.

Track your goals regularly. Make sure your education fund grows at a pace aligned with inflation in education costs.

Final Insights
Both approaches—using the same funds or separate ones—have merits. The choice depends on your current portfolio’s diversification and your preference for managing complexity.

Focus on disciplined investing and regular reviews. This ensures that both goals are achieved without compromising one for the other.

Best Regards,
K. Ramalingam, MBA, CFP
Chief Financial Planner

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