Among so many factors a child's growth hinges on, one of the most crucial ones is his or her education. While it is not an immediate expense, it's not economical either. Years from now, inflation, taxes and changing goals can dramatically shift the amount needed to fund higher education.
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Assuming that your child turns 18 in 12 years' time, you have this period to build a, let's say, Rs 1 crore corpus (in today's money). But simply investing in mutual funds is not enough. You need to account for taxes and inflation.
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Additionally, you cannot risk the entire portfolio by only investing in SIPs. As the timeline approaches, you need to have a sustainable equity to debt portfolio allocation. This reduces the volatility and ensures that you have the money when you need it the most.
What Is Rs 1 Crore Worth In 12 Years?
Assuming 6% inflation, after 12 years, you will need Rs 2 crore to maintain the purchasing power of Rs 1 crore today. This means that you need to build a corpus of Rs 2 crore, which is double the original target value.
How To Build Rs 2 Crore Portfolio in 12 Years?
If you simply invested in SIPs, you would need to start with an SIP of Rs 50,000 per month at a 10% annual step-up to reach Rs 2 crore in 12 years. This is before tax implications.
A simple way is to invest in life cycle funds. These are new mutual fund categories that are goal oriented. They have a fixed maturity and keep shifting your allocation towards debt components as the deadline approaches. By investing in these funds, you don't have to worry about constantly rebalancing your portfolio between equity and debt assets.
Assuming that a lifecycle fund gives 10% average annual returns:
Monthly amount: Rs 50,000
Step-Up % (annual): 10%
Investment duration: 12 years
Expected rate of return: 10%
Invested amount: Rs 1,28,30,570
Estimated returns: Rs 93,77,804
Total value: Rs 2,22,08,374
This means that after 12 years, you are likely to end up with Rs 2.22 crore corpus. Assuming that you withdraw it at once, your returns have a tax liability of more than Rs 11 lakh at 12.5%, the current rate for long-term gains.
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Since long-term gains are exempt from taxes till Rs 1.25 lakh every financial year, you can also strategically decide to withdraw your funds annually so that your tax liability reduces. You must understand that mutual fund returns are never guaranteed, so you must discuss such critical goals with an expert to avoid any financial stress later.
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