As part of our Investor education initiative, HDFC MF has sponsored a booklet on 'Plan Your Child's Education' which was printed and published with the current issue (December 30, 2013) of Outlook magazine.

1. december 2013
Plan your
child’s education

2. CONTENTS
Plan your
child’s
education
Get a fix on your target........... 3
Be an early bird...................... 5
Investing approach................. 9
Building MF portfolio. .......... 17
.
Reviewing the portfolio........ 22
The last mile........................ 24
DECEMBER 2013
Project Coordinator: Sunil Dhawan
Copy Desk: Sutirtha Sanyal
Design: Anil Panwar
Graphics: Varun Vashishtha
Photos: Bhupinder Singh
This booklet has been developed by Outlook Money for the readers of Outlook.
Copyright © Outlook Publishing (India) Private Limited, New Delhi.
All Rights Reserved.
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Printed and published by Indranil Roy on behalf on Outlook Publishing (India) Pvt. Ltd. Editor: Udayan
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The information provided herein is solely for creating awareness and educating investors/potential
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to act purely on the basis of information provided herein but also to seek professional advice from
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keep readers better informed and help them decide for themselves.
AN INVESTOR EDUCATION AND AWARENESS
INITIATIVE FROM HDFC MUTUAL FUND
1

3. Education
From
prEmiEr
institutions has
bEcomE thE
kEy to a
rEwarding
carEEr.
thE bEst oF
Education,
howEvEr,
comEs at
a pricE
2
to fund a child’s education will help one fulfil his
dream of seeing his child become a successful
engineer, doctor, or an MBA graduate. Read on how
mutual funds (MFs) can help you give your child the
best of education that you want to give him.
With career options becoming
fiercely competitive, education
from premier institutions has
become the key to a rewarding
career. The best of education
however, comes at a price.
Every parent wants the best
for his or her child’s future and
many parents end up digging
into their retirement kitty or take
a loan to meet the education
expenses of their children.
However, a proactive approach
Plan your
child’s
education
Get a fix
on your
tarGet
The first step of planning
for your child’s investment
is to get a fix on your target
amount and then work
backwards to ascertain
how much money you need
to put aside every month.
Since the funds would be
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4. required in the coming years, it is essential to factor
in inflation. Otherwise, it would be a major hurdle in
meeting your financial goals. For instance, at an inflation
of 7 per cent per year, an engineering course that costs
`8 lakh now will cost around `30 lakh after 20 years.
Assuming equity investments would grow at 12 per cent
compounded annualised, you need to put aside around
`3,000 per month to reach
that goal. Similarly, a two-year,
full-time MBA course at the
Indian Institute of Management
that costs around `10 lakh now
would cost around `38 lakh
after 20 years. Therefore, at
an assumed growth rate of 12 per cent, you will need to
put aside `4,000 per month to reach that amount. With
soaring education costs and high inflation, one could
consider going in for equity-oriented funds, as equity is
the only asset class that beats inflation in the long term.
Risk and reward always go hand-in-hand. If one does
not take the required risks, chances of getting a reward
reduces drastically.
4
Be an
early Bird
Plan your
child’s
education
The
sooner
you
start,
the
better
it is
The ideal time to
start planning is
when your child
is born. School
fees may not be a
big burden, but it
AN INVESTOR EDUCATION AND AWARENESS
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5. is for your child’s college and higher studies that you
would probably need to save in advance. Moreover,
the sooner you start, the better it is. This will have a big
impact on the overall corpus you create for your child’s
education. Many parents make investments for their
children out of sheer emotion. However, there has to be
some planning that will help you give your child not only
a better life, but also the freedom to choose his or her
career and build it in a better way.
how much will you nEEd to
accumulatE to Fund your child’s
proFEssional FEEs in FuturE
Plan your
secure
child’s
child’s
education
future
Get a fix on your
future tarGet
amount
The funds that would be required in the coming years
will be much higher than the current value.
Courses
engineering
MediCal
MBa
Current fees*
`8,00,000
`15,00,000
`10,00,000
expeCted Fees aFter
5 years
2,103,827
1,402,551
1,284,625
2,408,672
1,605,781
Education costs inflated at 7 per
cent per annum
10 years
1,573,721
2,950,727
1,967,151
12 years
1,801,753
3,378,287
2,252,191
* The average fees at reputed
colleges in that particular stream
6
1,122,041
7 years
15 years
2,207,225
4,138,547
2,759,031
20 years
3,095,747
5,804,526
3,869,684
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6. Small
investment
amounts
can do
wonders
in the
long-term
50,00,000
40,00,000
30,00,000
`
Small
steps
for
A big
dream
POWER OF COMPOUNDING
20,00,000
10,00,000
0
5
years
7
years
10
years
12
years
15
years
20
years
Tenure
12 per cent
8 per cent
5 years
`4,01,706
`3,64,723
7 years
`6,37,953
`5,54,725
10 years
`11,09,650
`9,00,621
12 years
`15,25,998
`11,79,797
15 years
`23,57,289
`16,88,031
20 years
`45,56,055
`28,44,995
The above table shows how an investment of
`5,000 per month would grow in two different
growth rate scenarios that fetch 12 per cent and 8
per cent returns, respectively.
The above illustration is based on assumed rates of return
only to explain the concept of Power of Compounding. It
does not depict, forecast or guarantee the returns given by
any instrument or asset class.
8
Investing approach
The mutual
funds route
Plan your
child’s
education
Planning a child’s future by way of mutual funds (MFs)
is ideal for those who do not have much time or expertise
to actively build a portfolio for this specific need. MFs
offer disciplined approach to achieve financial goals
with ease. Mutual funds are professionally managed
and offer diversification, which an investor does not get
when he or she invests in individual stocks or any other
financial instrument.
Most individual
investors do not
have the skills and
time to monitor every
single investment
in the manner a
professional fund
manager does it
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7. every day. Fund managers are highly trained and stick to
disciplined ways of investing. That is the reason investing
through MFs is a good form of investing. In addition, the
corpus you are building is for your child’s future. So, you
would prefer to hand it over to a professional, who with
his years of research, experience and expertise, would
help you meet your financial goals.
SIP advantage
There are several ways to create wealth through
MFs. You may keep investing a lump sum amount in
the chosen fund as and when available. Alternatively,
you may take the systematic investment plan (SIP)
route. SIPs involve investing a fixed amount of money
at regular intervals rather than investing a larger lump
sum amount. Decide how much you want to invest on a
regular basis. It is important to choose an amount that
you will be comfortable investing regularly over the long
term. This will ensure that you do not feel the burden of
investing at all, as you invest smaller portions regularly
10
Plan your
rather than a large chunk. An SIP averages out the
child’s
education
cost over the long term, thereby reducing the risk in
the long term. It works on the principle of rupee cost
averaging. The essence of SIPs is that when the
stockmarket falls, investors automatically acquire
more units. Likewise, they acquire fewer units when
the stockmarket rises. This means that you buy less
when the prices are
high and more when
the prices are low.
Hence, the average
cost per unit falls over
a period of time. For
salaried employees, it
makes sense to keep
investing a fixed sum
of money each month
towards funds, ideally
through direct debit
(automatic debit of
savings account).
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8. Kid’s
education
Your father deposits
`10,000 in bank and gets
`
`20,000 after 3 years. From
where does bank arrange this
extra amount?
a) Bank lends to other people and
earns interest from them
b) Bank incurs a loss
c) Bank uses other investors’
money to give it to your father
d) Banks borrow from other banks
to give it to your father
7
Which is better—taking
`100 every month or `1,200
after 12 months?
a) Take `100 every month as
what rupee can buy declines
with time
b) Take after 12 months as you
will get more
3
1
Amit, a class IX student
receives cash gifts from
relatives. What according to
you should he ideally do?
a) Give it to his parents
b) Buy gadgets
c) Save it in a bank
d) Make a budget to develop
good buying and spending habits
Your father has told you
that you would not get your
pocket money for a few
months. What would you do?
a) Swipe the credit card which your
father gave you for emergencies
b) Reduce your expenses and use
your savings
c) Borrow from a friend
Rahul wants a tablet. What
should he ideally do?
a) Break his piggybank and buy
b) Ask parents to fund it
c) Set time limit and keep saving
pocket money to reach the goal
d) Borrow from friends
Sooner you start saving,
faster your money grows
because of the effect of
a) Compounding, where interest
amount earned also earns interest
b) Falling purchasing power of
money over a period of time
2
12
child’s
4
5
Which of these are examples
of investment products?
a) Shares and mutual funds
b) Bonds and gold
c) Bank deposits
d) All of the above
6
Here is the answer sheet:
1. d 2.c 3.a 4.b 5.a 6.d 7.a
Here is the rePOrt CarD:
If you have scored less than 4: You
are a Money Novice. You need to
spend quality time with parents to
learn about money.
If your score is 5-6: You are a
Money Learner. You need to learn
the money ropes some more.
If your score is 7: You are a Money
Champ. You are off to a great start.
No matter you haven’t
started earning yet,
attempt this quiz to
see how well you are
equipped in handling
money matters!
uiz
Plan your
AN INVESTOR EDUCATION AND AWARENESS
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9. transfer it to a scheme (usually equity or balanced)
of his choice at regular intervals. STP works well for
investors who have a large sum of money and intend
to invest it in equity markets, but do not have the skill
or information to judge stockmarket movements and
time their entry into the stockmarket.
STP routes
If you have irregular income, systematic transfer plan
(STP) will help you beat stockmarket volatility. For those
who have a lump sum to invest, but would like to go the
SIP way, STP comes into play. Through an STP, you
can transfer parts of a lump sum from one MF scheme
to another (within the same fund house) at regular
intervals. Such a transfer averages out the cost of
purchase and mitigates market-related risks. The
investor can first park his funds in a liquid fund and then
14
Plan your
child’s
education
Choose the
right instrument
Simply saving for your child’s future by putting money
in your savings bank account is not going to help. One
needs to consider investing in the right instrument in
order to make sure that the fund is available when
required. For planning your children’s future, while the
investment options are galore, selecting them is a
Herculean task. For example, if the investment is
planned well in advance, one can start investment
with products that are entirely or partially equity-based.
When you have time on your side, say, 10 years or
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10. Building MF portfolio
For long-term
funding
so, you should invest in equity funds, preferably the
large-cap ones. However, if you are not willing to take
higher risk, you may stick to balanced funds as they
offer opportunities to gain from both debt and equity
markets with moderate risks. Here, debt gives cushion
to your investment, while equity provides growth. Other
options you can explore are child-oriented funds, which
are balanced funds, too. However, explore funds with
a larger portion of the portfolio exposed to equity, since
they can help you build a substantial corpus to meet
your financial goals, beating inflation in the form of rising
cost of living. Equity has a nature to reward long term
investors, thus, start early and stay invested for long.
16
Plan your
child’s
education
While drawing up
an MF portfolio, keep
certain basic rules
in mind, especially,
when you are building
a portfolio for your
children. Know the
broad categories of MF
schemes in the industry,
their purpose and, how
they work. This means,
for instance, knowing
the difference between
equity, balanced, and
debt funds—where
they invest, what
AN INVESTOR EDUCATION AND AWARENESS
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11. influences their performance and, what kind of returns
they are likely to generate. This will help you zero in on
appropriate matches for your risk profile and investment
objective. Respect your risk-taking capacity. Do not go
overboard on equities if you are not comfortable taking
risks. Keep your child’s requirement, say, his studies
and, the investment
horizon in mind
while drawing up
your portfolio. For
instance, if such
goals are in the
distant future and
you are willing to
court risk, the money
earmarked for them
should be invested
in equity funds. Over
long periods, equities
have the potential to
outperform all other
asset classes.
18
For short-term
funding
Plan your
child’s
education
If you have grown-up children and they are likely to go
to college soon, you will need a lump sum corpus at the
time of their admission. For such a situation, it is better
to park that money in debt-oriented MFs. For instance,
if your child is in Class X and will go for an engineering
AN INVESTOR EDUCATION AND AWARENESS
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12. course, you will have only two years in hand. In such
a scenario, you should choose debt-oriented funds
and fixed maturity plans (FMPs). FMPs are closedend debt funds with a fixed tenure. Choose an FMP
maturing at least a month before the time you need
the money. The reason is that all these instruments
give better post-tax return as well as liquidity.
parents need to keep track of what the requisite
funds would be. Children may or may not be sure
of their career goals yet, but a parent can conduct a
research to get a fair idea of how much funds would
be required for the different career options under a
particular stream the child may choose.
Plan your
child’s
education
Match the
financial goal to
the career goal
Once the child is born, parents should start saving for
the child’s higher education, as a lump sum amount
would be required in the future. Over the next few
years, as the child proceeds towards a stage where
he or she has to make clear-cut choice of his or her
education stream, it is important to understand the
career goal that the child is looking at. Simultaneously,
20
AN INVESTOR EDUCATION AND AWARENESS
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13. Reviewing
the portfolio
Plan your
child’s
education
If you think that your job is done once you have put
your money in MFs, then think again. Your portfolio may
contain star performers, but just a couple of oversights
could affect its performance.
Therefore, you need to stop along the way occasionally
to make sure that things are happening as planned.
Following a few rules will help you avoid the most
common mistakes one makes in building and
maintaining an MF portfolio. Track your scheme’s
net asset value (NAV) on a regular basis, but not too
frequently. Look for changes in the portfolio. Compare
the scheme’s performance with that of its benchmark,
or other similar schemes. If following up on your portfolio
regularly is not possible, make sure that you track your
fund at least every 18-24 months.
22
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14. the last mile
safety and
liquidity is more
important near
final destination
Plan your
child’s
education
DISCLAIMER
As part of its Investor Education and Awareness Initiative,
HDFC Mutual Fund has sponsored this booklet. The contents
of this booklet, views, opinions and recommendations are of the
The closer you get to your destination, the
more careful you need to be, lest you take a
wrong turn. The process of raising money from
investments for higher education should start
much before you need the money. Start moving
from riskier instruments to safe ones at least 2-3 years
before you would need the funds. Once closer to your
goal, transfer the corpus to safer instruments, such as
debt funds, in order to lock in the returns. The shifting to
debt funds would ensure de-risking the education fund,
as taking a prolonged unnecessary risk is the last thing
you would want to do as a parent.
24
publication and do not necessarily state or reflect views of HDFC
Mutual Fund. HDFC Mutual Fund does not accept any liability
arising out of the use of this information.
MUTUAL FUND INVESTMENTS ARE SUBJECT
TO MARKET RISKS, READ ALL SCHEME
RELATED DOCUMENTS CAREFULLY.
AN INVESTOR EDUCATION AND AWARENESS
INITIATIVE FROM HDFC MUTUAL FUND