Investing for Kids: The True Cost of Education: Why You Can’t Afford Not to Invest for Your Children
Extracts:
How important is it to plan finances for children? What do you think parents need to know about education?
Chirag Muni: It is very important to understand a few things. 1. Cost of education 2. Inflation and 3. Depreciation of the rupee. Let me elaborate on all three in a little bit.
1. Costs of training: Although consumer price inflation in India has fluctuated between 5 and 5.6 percent in recent years, the inflation rate in the education sector has been much higher at around 8 to 10 percent. This means that the cost of education could double every six to seven years.
2. Inflation
Let us take an example to understand inflation. Consider a private engineering college which charged tuition fees ranging between Rs 80,000 and Rs 100,000 per year in 2010. Today, in 2024, the same school charges Rs 2.8 lakh to Rs 3.2 lakh per year, which is an absolute inflation rate of around 300%.Click here to watch the full interview.
3. Devaluation of the rupee when studying abroad:
If you are a parent planning to send your child abroad for studies, you need to consider not only inflation but also the impact of a rupee depreciation of at least 4-5 percent per year on your expenses. The average inflation rate for overseas study funding was 9.7%. Is there a way for parents to cover these costs without any problems? How can they plan ahead?
Chirag Muni: To meet the obligations without much burden, start investing for your children. If you have a lump sum, invest that money or you can start investing a SIP of 10,000 from the first day of your child which will become 1 crore by the time your child turns 20. If you delay investing, it will put a lot of burden on you. For example, we have 4 parents – Parents A, B, C and D – who are investing in markets to fund their child’s education. Parents A and C started from day one. Parents B and D waited for 10 years, the result would be as follows.
ETMarkets.comParents A and C have achieved the desired outcome that will help them finance the cost of their children’s college education, but parents B and D have deficits in achieving the goal due to the delay in investing. So it’s never too early to start planning your long-term commitments.
Let us also talk about whether minors can invest in mutual funds.
Chirag Muni: Yes, a minor can invest in mutual funds, but only with the representation of a legal guardian or parent. The minor must be the sole account holder and it cannot be a joint account. Since a minor cannot make financial decisions alone, a parent or guardian can serve as the manager of the minor’s account. The guardian must be either a natural guardian (i.e., a parent) or a court-appointed legal guardian. However, there are a few points to keep in mind:
1. Requirements for KYC: Documents like proof of relationship, birth certificate of the minor and a bank account are required. A bank account can be the minor’s account, the account of a guardian or parent or a joint account.
2. In the case of investment funds, the money can come from any of these accounts, provided that they are registered in the minor’s folio. In the case of withdrawals, the money will be paid exclusively to the minor’s bank account registered in the folio or a joint account with the guardian registered in the folio.
3. Impact when a minor turns 18: When a minor turns 18, the guardian or parent should update the account status from “minor” to “adult” and re-initiate the KYC process, otherwise all operations on the account will be stopped. Once the account status is updated, the account will function normally again and the child will be able to manage their investments independently.
4. Tax implications: Until the minor reaches the age of majority, any winnings in the minor’s account will be included in the parent’s income and taxes will be paid by the parent. Once the minor turns 18 and their account status is updated, they will be treated as a separate entity and will be responsible for paying their own taxes.
Can you also go into more detail about where the money will be invested?
Chirag Muni: Pension and child gift funds are popular solution-oriented options and offer portfolios in equity, debt and hybrid categories. These funds are subject to a SEBI-mandated lock-in period of five years or until the child’s 18th birthday, whichever comes first. As of June 2024, child funds managed assets worth over Rs 20,000 crore.
There are also ULIPs for children offered by insurance companies which have a longer lock-in period and higher expense ratios. Moreover, government schemes like Sukanya Samriddhi Yojana focus on the financial future and well-being of children. Some of these investments offer tax deductions under section 80C and have a lock-in period till the child turns 21 years of age.
What is the performance of these child-oriented funds?
Chirag: Data shows that solutions-focused funds and similar categories have underperformed compared to diversified equity funds, which have a better track record of generating alpha. Diversified equity funds offer investors the flexibility to allocate assets across different categories and market capitalizations depending on their risk profile and investment horizon.
AgenciesWe recommend investors to choose diversified equity funds and spread their investments across different categories, market caps and AMCs to reduce concentration risk. Over the long term, the risk-return relationship in equity markets tends to be inversely proportional, with returns increasing and risk decreasing over time.
Disclaimer: Recommendations, suggestions, views and opinions of the experts/brokers do not reflect the views of Economic Times.
