The belief that a good education will provide for a good life, is entrenched in the way we think. Indian parents are willing to go to lengths to provide for their child’s education and are ready to spend as much as it takes for a good education. Many parents start saving when their child is very young, to prepare for future college related expenses
Education in India is viewed as a stepping stone to a good future. The race to get children into the best colleges is so keenly fought that every Indian parent can qualify for a role of an expert counsellor. The “padhai karo, nahi tho achchi Naukri kaise lagegi” line is so oft-heard that it could very well replace the “so jao varna gabbar aa jayega” line.
The belief that a good education will provide for a good life, is entrenched in the way we think. Indian parents are willing to go to lengths to provide for their child’s education and are ready to spend as much as it takes for a good education. Many parents start saving when their child is very young, to prepare for future college related expenses. But where exactly are Indian parents saving their hard-earned money?
Yes, this holds true for parents trying to save for their children even today. Real Estate is considered by many, to be a good long-term investment. But, real estate has lost its sheen as an attractive investment option over the past decade or so, due to excess inventory and regulatory impacts.
Since the time horizon that parents should consider is 15-20 years, real estate investments are good to maintain a diversified portfolio. But there are a number of hassles when investing in Real Estate, other than the declining returns in real estate – Unreliable deals, possible legal tangles and high wait times when one wants to sell.
Buying an insurance plan to provide income security to your child is also an option. Many of these so-called child plans provide insurance cover and also market-linked returns after a fixed tenure.
However returns on these plans have been volatile and impacted by frequent regulatory changes.
In India, the Public Provident Fund or PPF is the go-to option for many parents when investing for their child’s future. It is a low-risk option which is exempt from tax on withdrawal. The returns are lower but predictable.
However, there is a limit to the amount of money one can invest through this route – the upper limit is Rs. 1,50,000, annually. PPFs are also less suited when an investor is ready to take more risk and willing to invest in market-linked funds.
Investing in mutual funds as a way to build a corpus fund for a particular goal has gained a lot of interest in the past decade or so. Building a retirement fund or a home purchase fund are very common and a small percent of investors are also parents keen on saving up for their child’s education.
Investing in mutual funds is viewed as a potentially high-return investment with risk involved , since the returns on mutual funds are market-related. Markets have been extremely volatile in the recent past, but mutual funds should still form a large part of an education fund, considering the longer time horizon involved. It is possible to invest as per your risk preference and redemption is far easier when you need the money. With Systematic Investment Plans (SIPs) that give you the option of investing monthly, there is a possibility of better returns compared to one-time/lumpsum investment mutual funds, especially over longer investment periods.
In our next post, we will look at why we think Mutual Funds - through SIP mode - are a good way to build a corpus fund with the goal of educating your child. With this kind of an education fund you can stop worrying about the finances that are required to send your child to his or her college of her dreams. Your investment today, will gift your child a good life, tomorrow.
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