Excerpts:
How important is it to financially plan for kids? What do you think parents need to understand when it comes to education?
Chirag Muni: It is very crucial to understand a few things. 1. Cost of education 2. Inflation and 3. Rupee depreciation. Let me elaborate a bit on all three.
1. Cost of education: Even though India’s consumer price inflation has been hovering in the 5 to 5.6% range in the last several years, the rate of inflation in education has been significantly higher, at around 8-10%. 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 that charged Rs 80,000 to 1 lakh per year for tuition fees in 2010. Now in 2024, the same college is charging Rs 2.8 to 3.2 lakh per year, representing an absolute inflation rate of around 300%.Click to watch the full interview here.
3. Rupee depreciation in case of foreign education:
If you are a parent who aspires to send your child overseas for studies, you need to budget not just for inflation but also for the impact of rupee depreciation of at least 4-5 percent a year on your outgo. The average inflation stood at 9.7% for abroad education funding. Is there any way parents can ride these costs without any hiccups? How can they plan ahead?
Chirag Muni: To fulfill the commitments without a significant burden, start investing for your kids. If you have a lump sum, invest that money, or you can start investing a SIP of 10,000 from day 1 of your child, which becomes 1 crore by the time they turn 20. If you delay investing, it will cost you a heavy burden on the outcome. For example, we have 4 parents – Parents A, B, C & D who are investing in markets for their child’s education funding. Parents A & C started from day – 1. Parents B & D delayed for 10 years, the outcome would be as follows.
ETMarkets.comParents A & C achieved the desired outcome, which will help them fund their kids’ higher education expenses, but Parents B & D have shortfalls in reaching the outcome due to the delay in investing. So, it’s never too early to start planning for 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 can’t be a joint account, and since a minor is not allowed to make financial decisions on their own, a parent or guardian can act as the custodian of the minor’s account. The guardian must either be 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: It requires documents such as proof of relationship, minor birth certificate & bank account. A Bank account can be the minor’s account, guardian or parent account, or joint account.
2. For investing funds, the money can come from any of these accounts, provided they are registered in the minor’s folio. For withdrawing funds, the money will be paid out only to the minor’s registered bank account or a joint account with the guardian that is registered in the folio.
3. Implications when a minor turns 18: When a minor turns major, the guardian or parent should update the account status from minor to major and reinitiate the KYC, or else all the operations will be halted in the account. Once the account status is updated, it will start functioning normally, and the child can handle his investments independently.
4. Tax implications: Till the minor turns adulthood, all the gains made in the minor account will be clubbed under the parent’s income for taxation, and taxes will be paid by the parent. Once the minor turns 18 and his account status is updated, he will be treated as a separate entity and responsible to pay the taxes by himself.
Could you also elaborate on where to invest the money?
Chirag Muni: Retirement and children’s gift funds are popular solution-oriented options, offering portfolios in equity, debt, and hybrid categories. These funds come with a SEBI-mandated lock-in period of five years or until the child turns 18, whichever comes first. As of June 2024, children’s funds managed over Rs 20,000 crore in assets.
There are also child ULIPs offered by insurance companies, which have a longer lock-in period and higher expense ratios. Additionally, government schemes like Sukanya Samriddhi Yojana focus on children’s financial future and welfare. Some of these investments provide tax deductions under Section 80C and have a lock-in period until the child turns 21.
What about the performance of these child-oriented funds?
Chirag: Data shows that solution-oriented 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 categories and market caps based on their risk profile and investment horizon.
AgenciesWe recommend investors choose diversified equity funds and spread their investments across different categories, market caps, and AMCs to reduce concentration risk. Over the long term, in equity markets, the relationship between risk and return tends to be inversely proportional, with returns increasing and risk decreasing over time.
Disclaimer: Recommendations, suggestions, views and opinions given by the experts/brokerages do not represent the views of Economic Times.