SIP vs Education loan- Every parents want to secure their children’s future. But amid rising education costs, the biggest question is – should one invest in advance or take an education loan when needed? While mutual fund options like SIP can give good returns in the long term, education loan meets the immediate need but increases the responsibility of repayment later.
In such a situation, the right decision depends on your planning, risk-taking ability and time horizon. In this story, we understand which of these two options can prove to be better in which situation.
Why is investment necessary for education?
There is a lot of pressure on parents regarding the education of their children. Inflation in education increases by about 8 to 10 percent every year. In such a situation, it is very important to invest for the higher education of children. So that the pressure of big expenses does not increase on you suddenly and you do not have to compromise on other things. A good corpus can be created by combining equity mutual funds, PPF and Sukanya Samriddhi Yojana SSY (if you have a daughter).
Is investing in mutual funds right?
Children’s higher education needs arise when they reach the age of 18 (for graduation) or 21 (for masters). This means you have a long time, which is considered suitable for investing in mutual funds. Therefore, by investing in different categories of mutual funds, capital can be created for education.
What should be the ideal debt-equity ratio?
According to experts, if your investment time horizon is 7 years or more, the ratio of equity should be 70% and debt 30%. But if the time horizon is less, it would be wise to invest 50-50% in both equity and debt. Overall, it depends on your risk-taking ability.
When you get an education loan, why invest in mutual funds?
Even though education loans are easily available, it is still wise to invest in mutual funds as it provides a strong financial backup. If in the future the child is unable to get a high-paying job for some reason or the economic situation is not favorable, then repaying the loan may be challenging.
In such a situation, the investment corpus prepared in advance helps in dealing with that situation. Also, if the cost of education increases, then you can easily manage with the investment amount by taking a small education loan. Taking a loan brings financial discipline in the child and he understands the value of his education and uses it responsibly.
How much should one invest in education?
It is important to keep in mind the inflation rate for the years till the target. For example, if the target is 10 years away and inflation is increasing by 5% annually, then the total requirement should be calculated by adding 5% every year. If we look at this formula, the education which can be completed today for Rs 5 lakh, will cost around Rs 8.14 lakh after 10 years.
If you want to educate your child in another country, then keep in mind the inflation rate there. Apart from mutual funds, you can also invest in the currency of the country where you are planning to educate him, so that currency fluctuations do not spoil your plan.
Desclaimer: For any financial invest anywhere on your own responsibility, Times Bull will not be responsible for it.
