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Ramalingam Kalirajan |8192 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Dec 23, 2024

Ramalingam Kalirajan has over 23 years of experience in mutual funds and financial planning.
He has an MBA in finance from the University of Madras and is a certified financial planner.
He is the director and chief financial planner at Holistic Investment, a Chennai-based firm that offers financial planning and wealth management advice.... more

Question by Anil on Dec 22, 2024Hindi

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I want to invest 10lakhs for my kids education(3months old right now) and withdraw school fee from the returns. I will try not to use this money for any other purpose. My plan is to invest this amount in liquid fund and start a STP to in Nifty 50 index fund(50%), midcap Momentum fund(25%), Small cap momentum fund(25%). I want to keep this money only for my kids education purpose only. please let me know whether this is good idea or not. if it is good idea, please suggest fund allocation is correct or not.

Ans: Your plan to invest Rs. 10 lakhs exclusively for your child’s education shows foresight and commitment. Let us assess your approach and suggest refinements for better alignment with your goals.

Assessment of Your Current Plan
Liquid Fund for STP
Using a liquid fund for the initial investment is prudent. It provides stability and ensures systematic allocation.

Allocation to Index Fund (50%)
An index fund like Nifty 50 has lower costs but lacks active management. Actively managed large-cap funds may deliver better returns during market fluctuations.

Midcap and Small Cap Momentum Funds (25% Each)
Momentum funds can be volatile and require careful monitoring. This allocation might expose your portfolio to higher risk. A balanced mix of midcap and small-cap funds is essential to manage volatility.

Education-Only Approach
Keeping this fund solely for your child’s education is wise. It ensures you stay focused on the goal.

Suggestions for Fund Allocation
Equity Mutual Funds for Growth
Allocate 40%-50% to actively managed large-cap funds. These funds provide stability and reasonable growth.

Midcap Funds for Higher Returns
Allocate 25% to midcap funds. These funds offer a balance between risk and growth.

Small-Cap Funds for Long-Term Growth
Allocate 15%-20% to small-cap funds. Small caps perform well over 7-10 years but are riskier.

Debt Funds for Stability
Allocate 10%-15% to a hybrid or debt fund. This ensures liquidity and lower portfolio risk.

Benefits of Actively Managed Funds Over Index Funds
Outperformance During Volatile Markets
Actively managed funds can outperform during downturns. They protect your investment from large market corrections.

Professional Management
Expert fund managers adjust portfolios based on market conditions. This enhances returns over time.

Customisation for Goals
Actively managed funds align better with specific financial goals like education.

Taxation Awareness
Gains from equity funds above Rs. 1.25 lakhs are taxed at 12.5%. Withdrawals should be planned to reduce tax liability.

Tax Implications
Liquid Fund Withdrawals
Interest from liquid funds is taxed per your slab rate. Limit unnecessary withdrawals to save on taxes.

Equity Fund Gains
Long-term capital gains over Rs. 1.25 lakhs are taxed at 12.5%. Avoid frequent redemptions.

Debt Fund Withdrawals
Debt funds are taxed per your income slab for short-term gains. Withdraw selectively to manage taxes effectively.

Regular Monitoring
Track Fund Performance
Review fund performance every six months. Replace underperforming funds if needed.

Adjust Allocations
Rebalance your portfolio annually. Adjust allocations to align with market changes.

Keep the Goal in Mind
Ensure all actions align with the purpose of funding your child’s education.

Emergency Provisions
Emergency Fund
Do not compromise your emergency fund for this investment. Ensure Rs. 3-6 lakhs are set aside.

Health Insurance
Ensure your health cover is adequate. This prevents dipping into your child’s education fund for medical needs.

Final Insights
Your commitment to securing your child’s education is admirable. Refining your plan with actively managed funds can improve returns and manage risks effectively. Regular reviews and disciplined investing will help you achieve your goal.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

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

Asked on - Dec 23, 2024 | Answered on Dec 23, 2024

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Hi Mr. Ramalingam, Thank you very much for your response and time given. Withdrawing school fee from the invest of 10lakhs, is it a right approach? for the 1st 2-3 years I will try not to withdraw from this investment and I live in a tire 3 city Rajahmundry, Max. her education will be in the same place and I will try to add some more money to this investment after a year or so. Please suggest some funds in each category. Once again I thank you for the response. Thanks and Regards, Anil Kumar

Ans: Thank you for your follow-up. Withdrawing school fees from the returns of your Rs. 10 lakh investment is a reasonable approach. However, as education expenses grow over time, ensure your investments continue to grow to meet future needs.

Since you plan to avoid withdrawals for 2-3 years and might add funds, this allows your portfolio to compound further. For fund selection, I recommend reaching out to a Certified Financial Planner (CFP) like us or consulting a Mutual Fund Distributor (MFD). A professional can provide customised scheme-specific recommendations aligned with your goals and timelines.

Feel free to connect with us for detailed guidance.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

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

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