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Should I invest in a mutual fund or an education policy for my child?

Ramalingam Kalirajan |8932 Answers |Ask -Follow

Mutual Funds, Financial Planning Expert - Answered on Jul 25, 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

Asked by Anonymous - Jul 17, 2024Hindi

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Thankyou for the indepth analysis and encouragement.. im planning to do my sip's in a manner of increasing investment by 15 percent every year .. is it better to do a sip on a mutual fund or begin a tailor-made education policy for an amount of 1 crore for my childs education, within the next 15 years sir? If yes, plz do mention the name of funds, i will do more research

Ans: You have a noble goal to secure your child's education. Increasing SIP investments by 15% annually is a wise approach.

Systematic Investment Plan (SIP)
SIPs in mutual funds can offer substantial growth over time.

Benefits of SIPs
Compounding: Regular investments compound over time. This leads to exponential growth.

Rupee Cost Averaging: Investing a fixed amount regularly reduces the impact of market volatility.

Flexibility: You can start with a small amount and increase it. This matches your plan to increase investments by 15% yearly.

Liquidity: Mutual funds offer easy liquidity. You can withdraw funds when needed for your child's education.

Professional Management: Actively managed funds have professional fund managers. They aim to outperform the market.

Disadvantages of SIPs
Market Risk: SIPs are subject to market risks. However, long-term investments typically smooth out these risks.
Education Policy
Education policies are often insurance products combined with investment.

Benefits of Education Policy
Guaranteed Returns: They offer guaranteed returns. This provides a sense of security.

Insurance Coverage: They often include insurance. This can be beneficial in case of unforeseen circumstances.

Disadvantages of Education Policy
Lower Returns: Returns are usually lower compared to mutual funds. This affects the overall growth of your investment.

Less Flexibility: These policies are less flexible. Early withdrawal may incur penalties.

High Costs: They come with higher costs and charges. This reduces the net returns.

Why SIPs are Better
Higher Returns: Mutual funds, especially equity funds, offer higher returns. This helps in achieving the 1 crore goal faster.

Flexibility and Liquidity: SIPs provide flexibility in investments. They also offer easy liquidity when needed.

Professional Management: Actively managed funds can outperform market indices. This leads to better growth.

Investing Through a Certified Financial Planner
Professional Guidance: A CFP can guide you to choose the best mutual funds. They provide valuable insights and manage your investments.

Regular Funds: Investing through a CFP offers advisory services. Direct funds lack this professional guidance.

Disadvantages of Direct Funds
Lack of Advice: Direct funds do not offer advisory services. This can lead to mismanagement of funds.

Higher Effort: Managing direct funds requires more effort and knowledge. It may not be suitable for everyone.

Avoid Index Funds
Disadvantages: Index funds simply mimic the market. They lack professional management.

Lower Returns: Actively managed funds often outperform index funds. Fund managers adjust for market conditions.

Final Insights
Increasing SIP investments by 15% annually is a wise decision. SIPs in mutual funds offer higher returns, flexibility, and professional management. Education policies, while secure, provide lower returns and less flexibility. Consult a Certified Financial Planner for personalized advice. They can help create a tailored plan to achieve your goal of 1 crore for your child's education.

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner

www.holisticinvestment.in

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.