5 Reasons to Consider Mutual Funds for Child Education Planning

Child education is the priority for every couple. However, the advancements and increasing costs compromise the ease of getting a high-quality education. In such scenarios, proper investments can serve as the saviour. Planning and investing at the right time has become a necessity.

Among the other options, such as government schemes, fixed deposits, and others, one of the best methods to get higher returns for child education is mutual fund investment. But what makes mutual funds a preferred option? Apart from the flexibility to use a SIP calculator for the prediction of the returnable amount, there are more reasons to know. As information is necessary for an unbiased decision, we present to you all the insights.

5 Reasons to Consider Mutual Funds for Child Education Planning

We will focus on five key reasons for the better performance of mutual funds.

1. Investment Growth

With inflation impacting almost all sectors of life, the impact on education isn’t unexpected. With both abroad and national options available for students to study, the impact is the same. The cost of Indian education is expected to rise by up to 8%, while foreign currency depreciation is expected to rise by 4%. Hence, choosing any of the two scenarios requires either lots of fund availability or proper investment options.

Other investment options, such as fixed deposits and recurring deposits, often seem safer options owing to the lack of impact of market dynamics. However, the returns here are only up to 8%. Meanwhile, with mutual funds, the expectations can be up to 15%. Now, since we have stated the maximum rate percentage, which is challenging to get, the actual rates and returns will be lower.

Consider the case now. While the education costs will rise by 8%, the feasible FD you will get will be at a lower than 8% interest rate. On the other hand, the practical rate in mutual funds investment can be estimated at up to 10 to 12%. Use these rates to perform the calculation and find the exact gap in returns based on the principal amount you consider. The difference you will obtain makes mutual fund investment a worthy option.

2. Anywhere and Anytime Withdrawals

The common fund options require the submission of an amount for a specific period. In that period, the investor does not have access to the deposited amount. While this may be a typically safe option, the situation does not go well when considering children’s education. With the requirement of funds for pre-preparations to get the college of interest and semester-wise fee breakdown, the actual timeline of need remains uncertain. A fixed time of withdrawal with no prior or timely access to funds will not fulfil the need in time and will create a hassle.

Mutual funds, on the contrary, allow flexible access to the invested money. There lies no limit to withdrawal. Further, after the withdrawal, the remaining fund remains invested, generating returns for future endeavours. Adding to the flexibility, if investors plan carefully, they can also opt for a Systematic Withdrawal Plan or SWP. Here, they can get regular income returns from the invested mutual funds, eliminating the need to withdraw deliberately. They can also use the SIP calculator to identify possible returns.

3. Tax Saving

While all the modes of deposit allow investment in the name of minors, they are also associated with taxes. The tax is levied on the maturity of funds and is mandatory to be paid by the parents in the same financial year. Hence, the prospects of tax saving are lower with fixed and other deposits.

Though mutual funds are also taxed, the time of taxation is when the funds are redeemed. Since the funds are for child education, they are generally levied and calculated when a child has become major. Now, the child has to pay the tax. However, as they have no source of income, the situation attracts lower or no tax liability, making it a profitable option.

Further, in the scenario of elders investing in their own higher education, there remains a tax-saving option. It is similar to FDs and can be availed through Section 80C of the Income Tax Act. Investors can claim a deduction of up to 1.5 lakhs for specific investments.

4. Tenure Flexibility

Investments with fixed tenure come with a lack of flexibility in terms of tenure. With the need to mandatorily invest for a specified time being, the investor can end up with a loss of revenue generation due to premature withdrawal. Further, depending on the time, it may also result in a fine, loss of generated interest or both.

Mutual funds offer flexibility when considering the investment duration. In the absence of a fixed maturity date, the investor can choose to withdraw the amount anytime they want. It also does not influence the amount of generated interest, as investors get the returns as per the period of investment.

Investors can choose to invest in equity mutual funds when investing for longer durations. For shorter durations, hybrid or debt mutual funds are better options owing to lower volatility and higher stability.

5. Flexibility in Principal Amount and Investment Time

As couples generally strive to accumulate funds for their child’s education, their accessible funds for investment remain dwindling. While certain government schemes have a maximum limit to acceptance of the amount, fixed tenure-based schemes require investment in one go. The schemes are beneficial but lack flexibility in terms of principal amounts to investors.

Mutual funds remove such restrictions. Investors can choose any mode of investment, including periodic investment or lump sum, in one go. The period investments are available as a Systematic Investment Plan or SIP. Thus, investors can plan their accumulations and depositions accordingly,  considering all their income and expenditures.

Conclusion

The investors get numerous beneficial options to choose from. However, they are associated with certain pros and cons. While the same remains true for mutual funds, the benefits, features, and offered flexibilities make it a worthy option, especially when considering the child’s educational planning. Open to investment and withdrawal at your convenience, mutual fund investment must be made with proper knowledge, caution, and consideration of associated risks. We also recommend using the SIP calculator prior to making decisions to gain unbiased data for reference.