Equity Index Investing: A No-Nonsense, Low-Cost Way To Secure Your Child's Education Needs

Equity index funds, with their proven track record of high returns, offer a straightforward, low-cost, and effective way to stay ahead of rising education costs

Education costs are not only high but are increasing at about 12 per cent annually, nearly double the rate of general inflation.

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Children's Day on November 14 brings a reminder of a universal priority: securing our children’s future. As per the BankBazaar Aspiration Index, this is the No. 1 goal for all Indians. This isn’t without reason. Education costs are rising faster than general inflation, making it essential to choose an investment vehicle that not only matches but beats this pace.

With education inflation estimated at around 12 per cent per year, an education expense today can skyrocket in the coming decades. Equity index funds, with their proven track record of high returns, offer a straightforward, low-cost, and effective way to stay ahead of rising education costs. Here’s why equity index investing is a smart choice for parents planning for their child’s education.

THE IMPACT OF EDUCATION INFLATION

Education costs are not only high but are increasing at about 12 per cent annually, nearly double the rate of general inflation. This means if an education program costs Rs 1 lakh today, it will cost close to Rs 8 lakh in 18 years. A simple savings account, or even traditional fixed deposits, won’t grow fast enough to keep up. However, equity indices, like Nifty 50 or Sensex, have historically delivered annual returns of around 14 per cent and 15 per cent over 20 years, respectively. By investing in these, you’re essentially keeping pace with or even outstripping the relentless rise in education expenses, ensuring your savings don’t lose their value over time. In the above goal, a monthly SIP of Rs 5000 assuming an average annual return of 13 per cent, along with a 10 per cent annual step-up in monthly contributions, will create a corpus of over Rs 79 lakh in 18 years.

WHY EQUITY INDEX FUNDS STAND OUT

Equity index funds track the performance of a market index, like the Nifty 50 or Sensex, and offer high returns for a relatively low cost. Compared to actively managed funds, index funds don’t rely on fund managers’ expertise but on the general market’s growth, which has consistently yielded solid returns. For instance, in the last year alone, Nifty 50 and Sensex returned 22 per cent and 21 per cent, respectively. This makes index funds a low-maintenance and potent tool for long-term education savings. The expense ratio on index funds are much lower compared to active funds. Typically, we see the expense on these passive funds to be less than 0.10 per cent, which means higher returns for you in the long-term.

EASY TO START, SCALE, AND ADJUST

Index investing is user-friendly — whether you’re a new investor or an experienced one. Starting requires minimal effort and capital; once in, you can monitor your investments and adjust contributions based on your financial situation. Imagine starting with Rs 5,000 per month for a Nifty 50 fund, then increasing the amount by 10 per cent annually. This is a scalable approach which allows you to grow your contributions as your income grows. Additionally, index funds are flexible. You can step up, scale down, or even pause and liquidate investments if financial priorities shift. This makes them great for the ups and downs of family life. This makes them more attractive compared to other children’s investment options where liquidity can be an issue and you’d not be able to exit the scheme without incurring losses.

STAYING AHEAD OF MARKET VOLATILITY

Stock market fluctuations can be daunting. But history shows that the Indian stock market grows steadily over the long term. The Nifty 50’s 20-year return of 14 per cent demonstrates how patience can pay off. Let’s say you’re saving for 15 years.  By investing in an index fund, you’re able to smooth out short-term market shocks and benefit from the market’s overall upward trend. This long-term growth means that, even amid economic downturns, your child’s education fund is protected from inflation’s bite and even grows at a faster rate.

A TAX-EFFICIENT WAY TO SAVE

Equity index investing isn’t just effective. It’s tax-efficient, especially for long-term goals. Investments held for more than a year are subject to lower tax rates than many other investment forms. For instance, long-term capital gains on equities are taxed at just 12.5 per cent after a Rs 1.25 lakh exemption, compared to higher rates on fixed deposits. This tax efficiency translates to higher net returns, which more in your child’s education fund. So by choosing index investing, you’re not only growing your money but also saving on tax, which ultimately benefits your financial goal.

Investing in equity index funds is a pragmatic, low-cost, and inflation-beating strategy to fund your child's education. It’s straightforward to start, flexible to manage, and has a proven track record of high returns. This Children’s Day, let’s give our children the gift of a secure future by choosing investments that work as hard as we do to keep up with rising education costs.

The writer is Head of Communications at BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar.