How SIPs in Mutual Funds can help your children get a good education

28 JANUARY, 2020

The earlier you start your mutual fund, the more likely you are to afford a good education for your child.

Kiran Rajani is a disappointed mother. Her son Aryan graduated from one of India’s finest engineering colleges and wanted to go abroad to pursue his post-graduate degree. He got a good GRE score as well. But the Rajani’s business hasn’t been doing very well and they were not able to pay for the expensive tuition and lodging fees in the USA. Aryan will either have to postpone his dream of going abroad or will have to try it at an Indian institute.

Most Indian parents face this challenge at some point in their lives. They want to provide their children a good education but education today is increasingly getting more expensive. If you want your child to get a post-graduate degree from a good college, either in India or abroad, it is going to cost you a pretty penny.

An MBA from a good Indian college costs around Rs. 20 lakh today (inclusive of tuition and stay). If you plan to get your MBA from abroad, it will push you back by $120,000 (Rs. 84 lakh). If your child is five years old today, expect the cost of these degrees to go up by at least 130% in 17 years. This means an Indian MBA will cost you Rs. 46 lakh and a foreign one Rs. 1.92 crore (assuming a 5% inflation).

However, just because education is expensive doesn’t mean you have to give up on your dreams. Parents can start planning in advance by investing in mutual funds using SIPs (systematic investment plans). You will be able to fund at least 50-75% of your child’s education through your investments and the rest can be funded through an education loan. Let’s take a look at how mutual funds recommended by Kotak can help you hit your child’s education goals:

If you have 10-15 years to invest:

You can start SIPs in equity funds which take medium amount of risk for the first 10-15 years and then move the money to a less volatile option like a fixed-tenure instrument for the last 2-3 years.  If your child is going for an Indian MBA, you will need a corpus of around Rs. 32 lakhs for 70% of his fees. Investing only Rs. 3000 per month in 3 such funds assuming historical equity returns, will help you accumulate a corpus of ~Rs. 27.7 lakhs over 12 years.

Below are some equity funds which take low to medium amount of risk. These funds are recommended by Kotak Bank. Kindly note, the SIP funds below are a part of a model portfolio. The funds could vary as per your risk profile. To know the portfolio suitable for your risk profile, please connect with your Kotak Bank Relationship Manager.

Fund SIP Actual Return* Tenure (yrs) Expected Return# Investment Value
@12% Eq Return
Axis Bluechip Fund Rs. 3,000 13.81% 12 12% Rs. 9,24,287
Kotak Standard Multicap Fund Rs. 3,000 13.81% 12 12% Rs. 9,24,287
Mirae Asset Large Cap Fund Rs. 3,000 13.81% 12 12% Rs. 9,24,287
Total Rs. 9,000       Rs. 27,72,860


*Average of Kotak recommended large and multi cap funds over the last 10 years. Data as on 30th Nov, 2019. Funds valid from 30th Nov 2019  till 28th Feb, 2020.
#We have assumed post tax return of 12% for equity for calculation purpose. The projected rates of return are only for illustrative purposes only.

The amount accumulated from equity can be invested into a fixed-tenure instrument at a 5% return for three years will give you a final corpus of Rs. 32 lakh after 15 years.
If you are planning for a degree abroad, you will have to target a corpus of Rs. 1.34 crores (70% of fees). Your investments will be substantially higher. Using the same three funds, your SIPs will have to increase to Rs. 13,000 each per month.

Kindly note, the funds below are a part of a model portfolio. The funds could vary as per your risk profile. To know the portfolio suitable for your risk profile, please connect with your Kotak Bank Relationship Manager.  

Fund SIP Avg Return* Tenure (yrs) Expected Return# Investment Value @12% Eq Return
Axis Bluechip Fund Rs. 13,000 13.81% 12 12% Rs. 40,05,243
Kotak Standard Multicap Fund Rs. 13,000 13.81% 12 12% Rs. 40,05,243
Mirae Asset Large Cap Fund Rs. 13,000 13.81% 12 12% Rs. 40,05,243
Total Rs. 39,000       Rs. 1,20,15,728


*Average of Kotak recommended large and multi cap funds over the last 10 years. Data as on 30th Nov, 2019. Funds valid from 30th Nov 2019 till 28th Feb, 2020.
#We have assumed post tax return of 12% for equity for calculation purpose. The projected rates of return are only for illustrative purposes only.

This will give you an approximate corpus of Rs. 1.2 crores after 12 years. Investing that into a fixed-tenure instrument at a 5% return for three years will give you a final corpus of Rs. 1.39 crore after 15 years.

If you have 5-10 years to invest

If you have lesser time, you can’t invest all your money in mutual funds that give high returns, you also have to look at funds that offer stability. A smart move here would be to invest 50% of your funds in equity funds which take low risk and 50% in debt funds which are moderate – low risk funds. The time period taken is eight years after which you transfer your funds into a fixed tenure instrument for 2 years.

Kindly note, the funds below are a part of a model portfolio. The funds could vary as per your risk profile. To know the portfolio suitable for your risk profile, please connect with your Kotak Bank RM.

Let’s a take a look at the average of Kotak recommended low risk equity funds and low – medium risk debt funds in which you can invest to build an education corpus for an Indian MBA:  

Fund SIP Avg Return* Tenure (yrs) Expected Return# Investment Value @Expected Return
Mirae Asset Large Cap Fund Rs. 5,000 13.81% 8 12% Rs. 7,77,740
Axis Bluechip Fund Rs. 5,000 13.81% 8 12% Rs. 7,77,740
HDFC Short Term Debt Fund Rs. 5,000 8.45% 8 7% Rs. 6,35,097
Kotak Banking & PSU Debt Fund Rs. 5,000 8.45% 8 7% Rs. 6,35,097
Total Rs. 20,000       Rs. 28,25,674


*Average of Kotak recommended large and multi cap funds over the last 10 years. Data as on 30th Nov, 2019

*Average of Kotak recommended banking & psu debt and active short term funds over the last 3 years. Data as on 30th Nov, 2019. Funds valid from 30th Nov till 28th Feb, 2020.

#We have assumed post tax return of 12% & 7% for equity and debt respectively for calculation purpose. The projected rates of return are only for illustrative purposes only.
If you are going abroad you will have to invest:

Fund SIP Avg Return* Tenure (yrs) Expected Return# Investment Value @Expected Return
Mirae Asset Large Cap Fund Rs.21,500 13.80% 8 12% Rs. 33,44,283
Axis Bluechip Fund Rs. 21,500 13.80% 8 12% Rs. 33,44,283
HDFC Short Term Debt Fund Rs. 21,500 8.45% 8 7% Rs. 27,30,917
Kotak Banking & PSU Debt Fund Rs. 21,500 8.45% 8 7% Rs. 27,30,917
Total Rs. 86,000       Rs. 1,21,50,400


*Average of Kotak recommended large and multi cap funds over the last 10 years. Data as on 30th Nov, 2019

*Average of Kotak recommended banking & psu debt funds over the last 3 years. Data as on 30th Nov, 2019. Funds valid from 30th Nov till 28th Feb, 2020.

#We have assumed post tax return of 12% & 7% for equity and debt respectively for calculation purpose. The projected rates of return are only for illustrative purposes only.

If you have 5 years to invest:
This gets tricky because an individual should typically hold a mutual fund for at least five years to get visible results. However fret not, there are funds which can come to your rescue even if you have only five years to invest.

You could consider starting an SIP into a dynamic asset allocation funds such as Balanced Advantage Funds which change their asset allocation between equity and debt depending on market conditions. This can provide you returns with lower volatility as they maintain 40-50% allocation to equity and the remaining to debt, hence taking care of your asset allocation. Further investing by way of an SIP ensures you achieve rupee cost averaging.

To achieve Rs. 32 lakhs (70% of fees) in 5 years, below are funds which are part of a model portfolio. The funds could vary as per your risk profile. To know the portfolio suitable for your risk profile, please connect with your Kotak Bank Relationship Manager.  

Fund SIP Avg Return* Tenure (yrs) Expected Return# Investment Value @Expected Return
ICICI Prudential Asset Allocator Rs. 36,000 10.85% 3 9.5% Rs. 14,83,964
Kotak Balanced Advantage Rs. 36,000 10.85% 3 9.5% Rs. 14,83,964
Total Rs. 72,000       Rs. 29,67,929


*Average of Kotak recommended dynamic asset allocator funds over the last 1 year. Data as on 30th Nov, 2019. Funds valid from 30th Nov till 28th Feb, 2020.

#We have assumed post tax return of 9.5% for dynamic asset allocation funds for calculation purpose. The projected rates of return are only for illustrative purposes only.
Investing the proceeds into a fixed-return instrument at a 5% return for two years will give you a final corpus of Rs. 32.72 lakhs after 5 years. One must note here, that since the time to goal is less, the investor’s risk taking ability reduces as there is less time to recover from market fluctuations. Hence we have chosen funds which have 40-50% allocation to equity and accordingly lower return expectation of 9.5% as against 12% by pure equity funds. Further on an overall basis, total equity allocation over the goal tenure of 5 years is restricted to 20-30%.

Although the concept of SIP in dynamic asset allocation funds is rarely used, it is a suitable option when money is required after a relatively short period of time but inflow is continuous.

However before you start investing, please ensure you are investing in line with your risk profile. Equity investments are only suitable for risk profiles which are Secure and above.

So don’t wait and get started now. Even if you are planning to have a child, start thinking about their future. Visit your bank to build a better future for your child. Invest now.

 

Disclaimer

The projected rates of return are only for illustrative purposes to demonstrate the amount of SIPs required to be made for achieving a targeted investment goal and should not be constructed as a promise, guarantee or a forecast of any minimum returns or future returns. Kotak Mahindra Bank does not assure any rate of return or safeguard of capital and investments made through SIP, and does not guarantee or assure any protection against losses. Past performance may or may not be sustained in the future.

#Mutual Funds are subject to market risk. Please read all scheme related documents carefully before investing.

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