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Should I use my EPF for my daughter's education or continue investing in mutual funds?

Moneywize

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Financial Planner - Answered on Oct 21, 2024

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Asked by Anonymous - Oct 19, 2024Hindi
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I’m 42 years old, married, with one daughter aged 12. I live in Goa. I’m considering using my EPF for my daughter’s higher education. Should I use this or continue investing in mutual funds for better returns?

Ans: At 42, with your daughter’s higher education likely around 5-6 years away, it's important to balance between preserving capital and seeking growth. Here’s a comparison to help you decide between using your EPF (Employees’ Provident Fund) and investing in mutual funds:

1. EPF:

Pros:

• Safe and guaranteed returns: EPF currently offers an interest rate of around 8-8.5%, which is relatively high for a low-risk investment.
• Tax benefits: EPF withdrawals after 5 years of continuous service are tax-free, including the interest earned.

Cons:

• Moderate growth: While safe, the returns may not be as high as equity mutual funds over the long term.
• Compromising retirement funds: Using EPF for education could deplete your retirement savings, making it difficult to maintain financial security in your later years.

2. Mutual Funds:

Pros:

• Higher potential returns: Over a 5-6 year horizon, a well-diversified mutual fund portfolio (especially balanced or equity funds) could offer better returns, typically in the range of 10-12%.
• Flexibility: You can tailor your investments based on your risk tolerance (e.g., shift from equity to more conservative debt funds as the education expenses approach).

Cons:

• Market risk: Mutual funds are subject to market volatility, which could lead to fluctuations in your investment value, especially in the short term.
• Capital gains tax: Equity investments held for less than a year are taxed at 15%, and long-term capital gains exceeding Rs 1 lakh are taxed at 10%.

What you can do:

• Maintain your EPF for retirement: Since EPF is a safe retirement corpus, it’s advisable to avoid using it for non-retirement purposes unless absolutely necessary.
• Continue with mutual fund investments: Given the time horizon of 5-6 years, you can continue investing in mutual funds, especially in a mix of equity and hybrid funds. As the time nears, gradually move towards safer debt or balanced funds to reduce risk.
• Consider a targeted education fund: You could start a dedicated mutual fund or a systematic investment plan (SIP) specifically for your daughter's education, while keeping your EPF intact for retirement.

This balanced approach can help you fund education without compromising your retirement security.
DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Users are advised to pursue the information provided by the rediffGURU only as a source of information to be as a point of reference and to rely on their own judgement when making a decision.
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Asked by Anonymous - Jul 08, 2024Hindi
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I have left my job 1.5 year back for pursuing business. I have PF and pension of around 2.5 lac lied in EPF account, the return I am getting on Provident fund isn't giving me pleasure, Although I have doing SIP of 6000 per month also which is giving me 100% return as of now, hence making my mood to switch EPF fund to equity or mutual fund. What would be better for me, plesse suggest.
Ans: You left your job 1.5 years ago to pursue business. You have Rs 2.5 lakh in your EPF account. You are not happy with the returns from the EPF. You also have an SIP of Rs 6000 per month. This SIP has given you 100% return so far. You are thinking of moving your EPF funds to equity or mutual funds.

Evaluating Your Options
EPF Account
The EPF account is a safe investment. It provides fixed returns. It is also tax-free on withdrawal. However, returns are usually lower compared to equity or mutual funds.

Equity Investments
Equity investments can provide high returns. They are, however, risky. Market fluctuations can impact your investments. They require good market knowledge.

Mutual Funds
Mutual funds can balance risk and returns. They are managed by experts. There are various types of mutual funds. Each type suits different risk profiles.

Advantages of Actively Managed Funds
Actively managed funds are overseen by fund managers. These managers aim to outperform the market. They use research and analysis. They adjust the portfolio based on market trends.

Disadvantages of Index Funds
Index funds mirror a market index. They do not try to outperform the market. They offer lower returns compared to actively managed funds. They do not adapt to market changes quickly.

Regular Funds vs Direct Funds
Regular funds are purchased through an intermediary. This intermediary could be a Certified Financial Planner (CFP). CFPs offer valuable advice. They help with investment planning. They provide insights into market trends.

Direct funds, on the other hand, are bought directly from the fund house. They have lower expense ratios. However, they do not offer the advisory support provided by CFPs.

Recommendations for Your EPF Funds
You might consider moving part of your EPF to mutual funds. This could provide better returns. However, keep some portion in EPF for safety.

Here are a few steps to consider:

Assess Your Risk Tolerance: Understand your comfort with market risks. Equity and mutual funds can be volatile.
Diversify Your Investments: Do not put all your funds in one type of investment. Balance between EPF, equity, and mutual funds.
Consult a Certified Financial Planner: A CFP can guide you. They can help balance your portfolio. They can provide insights into market trends.
Reevaluate Your Investment Periodically: Keep checking your investments. Make adjustments as needed.
Final Insights
Your decision to move EPF funds to mutual funds can be beneficial. It requires careful planning. Balancing between safety and returns is key.

Best Regards,

K. Ramalingam, MBA, CFP,

Chief Financial Planner,

www.holisticinvestment.in

..Read more

Moneywize

Moneywize   |174 Answers  |Ask -

Financial Planner - Answered on Oct 03, 2024

Asked by Anonymous - Oct 02, 2024Hindi
Money
I’m 36 with two children aged 7 and 5, living in Indore. My husband and I want to save for their education and our retirement. We’ve already invested Rs 10 lakh in mutual funds. Should we continue investing in equity or shift some towards PPF for better security?
Ans: As a 36-year-old couple living in Indore with two young children aged 7 and 5, planning for their education and your retirement is essential. You have already invested Rs 10 lakh in mutual funds, which is a good start, but deciding whether to continue investing in equity or shift towards safer options like PPF (Public Provident Fund) depends on various factors like risk appetite, investment goals, and time horizons.
Step 1: Define Your Financial Goals
When it comes to financial planning, it’s crucial to outline specific goals:
1. Children’s Education: The cost of higher education, both in India and abroad, has been rising significantly. Assuming that your children will start higher education in around 10-12 years, you need to estimate the costs accordingly. For example, education in India for courses like engineering or medicine can cost Rs 20-40 lakh, while overseas education can range from Rs 1-2 crore, depending on the country and course.
2. Retirement: Assuming you and your husband plan to retire around the age of 60, you have roughly 24 years to build your retirement corpus. With increasing life expectancy and inflation, it’s important to accumulate a large enough corpus to sustain your lifestyle for at least 20-30 years post-retirement. Typically, you would need around 70-80% of your pre-retirement income to maintain your lifestyle.
Step 2: Understanding the Role of Equity in Your Portfolio
Equity Mutual Funds are an excellent option for long-term wealth creation due to their potential for high returns. Historically, equity has outperformed other asset classes, especially over periods of 10-15 years or more. However, it is also more volatile in the short term.
Given that you have a long-term horizon for both your children’s education and retirement, staying invested in equities can help you take advantage of market growth. The power of compounding works best when you give your investments time to grow, making equities a good choice for long-term goals.
Key Benefits of Equity Mutual Funds:
1. Higher Returns: Over the long term, equity funds have the potential to deliver 10-12% returns annually, which can significantly outpace inflation.
2. Flexibility: You can choose between various types of equity funds, such as large-cap, mid-cap, and small-cap funds, based on your risk tolerance.
3. Tax Efficiency: Long-term capital gains (LTCG) tax on equity mutual funds is relatively lower (10% on gains exceeding Rs 1 lakh) compared to other investment vehicles.
However, if you’re uncomfortable with market volatility, it might make sense to diversify your portfolio to include less risky assets like debt funds, PPF, or fixed deposits.
Step 3: Assessing the Benefits of PPF for Security
The Public Provident Fund (PPF) is a popular investment option in India due to its safety and tax benefits. It offers a guaranteed return, currently around 7-8%, and is backed by the government. Additionally, it comes with tax benefits under Section 80C of the Income Tax Act, making it an attractive option for risk-averse investors.
Key Benefits of PPF:
1. Capital Safety: Since PPF is a government-backed scheme, there is zero risk of capital loss, making it a secure option.
2. Tax-Free Returns: The interest earned on PPF is tax-free, and the contributions are eligible for deductions under Section 80C.
3. Guaranteed Returns: Though the returns are lower than equity, the consistency and security it offers can be beneficial, especially in volatile market conditions.
Step 4: Balancing Equity and PPF
To determine whether you should continue investing in equity or shift part of your funds to PPF, you need to evaluate your risk appetite and the nature of your financial goals:
1. Children’s Education: Since you have 10-12 years before your children’s higher education, you can continue to invest in equity mutual funds for at least the next 5-7 years. Equity is suitable for wealth accumulation over the long term, and you can shift towards safer debt instruments or PPF closer to the time when you need the money, reducing exposure to market volatility.
A balanced approach could be to maintain around 70-80% of your investment in equity for the next few years and slowly move part of the corpus into safer options like debt funds or PPF once your children approach their teenage years.
2. Retirement: Since your retirement is about 24 years away, you can afford to stay heavily invested in equity for the long term. However, as you approach your retirement, say within the last 10 years, you can begin gradually moving your funds into safer instruments like PPF or debt mutual funds to protect your capital from short-term market volatility.
At this stage, maintaining a balanced portfolio with around 60-70% in equity and 30-40% in debt/PPF can provide you with both growth and stability. As you get closer to retirement, this ratio can be adjusted to reduce risk.
Step 5: The Case for a Diversified Portfolio
Rather than choosing between equity and PPF, the best approach would be to diversify your investments. A well-diversified portfolio that includes equity mutual funds for growth and PPF or debt instruments for security can help you achieve both your short-term and long-term goals.
1. Equity Mutual Funds: Continue your equity investments, especially in large-cap or multi-cap funds, which provide relatively stable growth.
2. PPF or Debt Funds: You can start allocating a portion of your savings to PPF for security and tax-free returns. Additionally, consider debt mutual funds, which offer better liquidity compared to PPF and provide moderate returns.
Conclusion: A Balanced Approach
Given your long-term goals for both education and retirement, continuing with equity investments is advisable due to their high growth potential. However, as you approach the time when you need the funds, shifting a portion of your portfolio to secure options like PPF can reduce the risk. A balanced portfolio, with a mix of equity for growth and PPF for security, will help you achieve your financial goals while managing risks effectively.

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I am 37 year old Commerce Graduate. I was in an unorganized business, which cannot be pursued any farther. Will it be wise to do CPA at this age without formal experience in Accounting, for a decent job? Is there any other course to pursue?
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My son is doing BBA( 1st year.) Which extra course help him future.
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Sir Greetings! is it true that now UGC wont differentiate rather treats equally both regular and correspondence degree or PG. Even correspondence students are eligible and apply for both govt and private sector jobs. I heard even companies need to accept correspondence degree done in India. Sir please clarify without any ambiguity in this regard. This is Q has been bothering me for quite sometime
Ans: Anirvinna, The University Grants Commission (UGC) and other regulatory bodies in India have made significant efforts to ensure that distance education degrees are treated as equivalent to regular degrees. The UGC states that degrees obtained through distance or online education from recognized institutions are equivalent to regular degrees, applicable for both government and private sector jobs. The Distance Education Bureau (DEB) ensures the quality of distance education programs and oversees compliance. Distance education degrees are valid for all government jobs, professional courses, and private sector acceptance. However, some organizations may prioritize candidates with regular degrees for certain roles due to perceptions of classroom rigor or networking opportunities. The UGC has encouraged universities to offer quality online programs, reducing the stigma associated with correspondence education. To enhance career prospects, consider pursuing correspondence programs from well-reputed institutions with strong alumni networks and industry connections. All the BEST for your Prosperous Future.

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DISCLAIMER: The content of this post by the expert is the personal view of the rediffGURU. Investment in securities market are subject to market risks. Read all the related document carefully before investing. The securities quoted are for illustration only and are not recommendatory. Users are advised to pursue the information provided by the rediffGURU only as a source of information and as a point of reference and to rely on their own judgement when making a decision. RediffGURUS is an intermediary as per India's Information Technology Act.

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