Looking to build a corpus for your child’s higher education? Here’s how an SIP can help you
A steep rise in the cost of education expenses has made higher education extremely un affordable for many. As an outcome, you are left with the only option of opting for an education loan to fund your child’s higher education costs. While an education loan provides your child instant access to the required funds, opting for this route often burdens your child to repay the loan in the initial years of their career. One of the best ways to avoid such a situation is to build their higher education corpus steadily through SIP investments. Read on to understand the step wise process to form your child’s higher education corpus through an SIP mutual fund –
Estimate your corpus requirement
While it is difficult for you to know your ward’s career choices, you can still assume 3 to 4 options and factor in the amount required currently to achieve the same. As the expenditure for education is facing steep inflation since past few decades and might continue to increase more in the future, ensure to inflate the most expensive higher studies choice by assuming a 10 per cent annual inflation rate. Doing so would allow you to stay on the safer side while forming your child’s higher studies corpus.
Once you know the figure that you require to arrange, take the assistance of an online SIP return calculator to compute the monthly contribution that you require to create that corpus money. Invest in debt funds or fixed-income securities if you hold below 5 years’ timeframe to attain your target fund as equities may be volatile over the short term. Note that, investing in fixed-income securities may provide you with higher capital preservation and return certainty features. However, as the equities generally beat the fixed asset instruments over the long run by a wide margin, invest in equity funds if your time frame to form your ward’s corpus for education is 5 years and above.
Begin investing early
Beginning your investment early permits you to derive maximum owing to the compounding effect. With the power of compounding, your gains from investments start to generate returns on their own, which eventually grow into a bigger amount over the long run. For instance, if you want to form an education corpus equaling Rs 20 lakh over a time period of 15 years, then you need to monthly invest Rs 4,003 at an assumed annual return of 12 per cent. However, to form the same corpus within a period of 7 years at the same return rate, you will require a higher monthly investment of Rs 15,305. So, if you begin your investments early, you would be able to create a bigger corpus with a smaller monthly contribution.
Go for the SIP mode
Opting for the SIP mutual fund investment mode inculcates financial discipline through periodic investment. This investment option ensures rupee cost averaging by buying a higher number of units at lower NAVs (net asset value) during times of market corrections and even eliminates the requirement for market timing. Thus, always ensure to enhance your contribution towards an SIP in alignment with your income growth. Try and add funds to your SIP account during falling markets. Doing sowould allow you to buy more units at a lower value, which can help you to get your target corpus faster.
Review your investment periodically
Timely reviewing the performance of your funds at periodical intervals is important as best-performing mutual funds with excellent past records may become under performers over the long run. Thus, striking a comparison among the returns yielded by your investments in a mutual fund through an SIP over the past one year with its peer funds and benchmark indices is important. Shift to better performing funds if your prevailing funds in SIPs have continuously under performed their benchmark indices and peer funds over the past 3 years.
Meticulous financial planning coupled with disciplined investments can go a long way in providing adequate funds for your child’s higher education. Note that you must select the mutual fund to invest through an SIP after a thorough analysis of different factors like your risk appetite, time horizon, etc. and ensure to begin your investment early. Beginning early on your investments for your child’s higher education gives more time to your funds to grow owing to the power of compounding.