My son is one year old. How do I start investing for his educational fees. Is 1000 rs a month a good investment? If not, kindly let me know the ideal amount to invest?
It’s a good decision to start planning for the kid’s education as early as possible. Here you have not mentioned your place of residence so I assume it to be one of the metropolitan. The school fees for kids are escalating every day. Apart from monthly/quarterly education fee, you have to pay for registration, conveyance and other related expenses. For first 5 years of education you would need approx Rs 3000 per month including conveyance, study material, uniform and monthly fee. Here the overall charges may vary depending on the school and location. It means you need Rs 1.8 Lac in 5 years assuming inflation to be constant. If we assume inflation at 6-7% then the amount would further go up. So, I would suggest you to increase the investment to at least Rs 2000 to Rs 2500 per month (in Bank RD) till kid join the school (after 1 to 1.5 years). Post school joining you can save Rs 1000 over and above the actual monthly expense to cope with inflation and future studies planning. You are also advised to review investment amount from time to time.
Since the investment period will be for fifteen years and more, you must look at equity. These have been known to beat inflation in the long run. Since stocks may not suit everyone’s risk appetite, it is prudent to start investing initially in MFs. You can first buy about 2-3 large cap diversified equity funds that invest in big names and the best firms.
As the years progress and you gain confidence with MFs, you can look at other funds to enhance returns from your portfolio. When you invest in MFs, always choose reputed fund houses. You need to ensure that the fund house is good enough to survive those 15-20 years. You don’t want to get stuck with a fund house that will be taken over or acquired by another, right? You need to go through the whole hassle of changes to your fund if that happens. So, choose a good fund house that will last your investment period. So which are the good ones? These are fund houses with a strong promoter backing and a decent performance track record to their credit.
Now that you have chosen the fund houses, choose the funds that you want to invest in. Understand how they work and what has been their performance. Like we said, start with large cap funds that invest in blue chip stocks. You can choose mid-cap funds that invest in smaller companies after you are comfortable with your MF investments. You could even add more funds like tax-saver funds, balanced funds, debt funds and gold Exchange Traded Funds (ETF).
However, don’t add funds to your portfolio unless they match your risk appetite. As a parent, you need to understand whether the investment will suit you. Assess your risk as well as return expectations before you add more funds. These will ensure that you stick to the investment till you meet your goals.
When you are saving for your kids, you need to ensure that you invest continuously. As you might know, long term investments, especially in the case of equity take time to show returns. Rather than looking at returns every day or every month, you should ensure that the average year-on-year returns from your equity investments are enough to achieve the target amount. This means that if the markets are on a roller coaster for a year or two, you must ensure that the average growth of your portfolio has slowed but not plummeted.
Also, understand the fund thoroughly before you invest. Some funds are riskier than others. Take the help of a financial planner if you think you don’t have enough knowledge or if you don’t understand the risks involved. If, as a parent you take extra initiative to understand the nature of the investment, it can help you minimise the risks involved. This will also help you gain better returns from your investments. For example, if you can grasp the volatile nature of equity MFs, you will not make the mistake of exiting investments prematurely which pushes you to lose the opportunity to grow your money.
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