MF Corner | PPF, SSY, NPS Vatsalya Or MF: Which Builds The Largest Education Corpus For Your Child?

[00:00:13]Hello, good afternoon. You tune in to MF Corner on CNBC TV18. I'm Vini Motivival.

[00:00:18]With me is my colleague Sonel Budra.

[00:00:20]Sona, good afternoon. And obviously what continues to be seen every time is education inflation. That's not stopping 10 12% every year. And that's what we don't want to know right where to invest in how do you beat that inflation and I'm sure as a mom you face it too as well now.

[00:00:36]>> Oh yes education inflation this is one of the fastest rising costs Indian families face today. While overall inflation may be around 5 to 6% education expenses they have been growing at nearly double that pace. That means the cost of a college degree could multiply several times over by the time a young child is ready for higher education. So how can parents stay ahead of this rising bill? What are the top mutual funds you can invest in for your child's future? What works well? Is it the Sukanya Samrudi scheme for girls? Is it the public provident fund? You have a lot more other ways of investing, right?

[00:01:06]Which you could use later. To discuss all this and compare different investment avenues. We have with us Abhishek Kumar, Sebi, registered investment advisor and founder of Sahage Money and Marin Agraal, financial educator and director at Finsafe India.

[00:01:19]Abushek Min thank you so much for joining us and uh inflation is all we can talk about and education be it in India or abroad continues to be a big debate as well. Lady let me start with you first. Uh education inflation as I said is running at 10 to 12% annually more than double the general CPI. A course costing 40 lakh today could cost maybe 1.46 cr in 15 years. So before we even talk instruments, do most Indian parents have a realistic number in their head and what corpus should a parent of a newborn actually be targeting today?

[00:01:52]>> Uh good afternoon Sonel and Vinnie and it's lovely to be here today. Um so I think I think uh most Indian parents do tend to underestimate the amount that's really required uh for uh the child's education and I think there are two main reasons for it because one people find it very difficult to you know do the inflation adjusted number although of course there are a lot of calculators that are available online but that being said people still find it really difficult to figure out what could be the inflation adjusted number and somehow tend to forget about the inflation on this. And um the second thing is also underestimating that number because what is happening is that with the changing preferences that children themselves have sometimes what happens is that parents have planned for the traditional courses whereas now you know there are a lot of lot of newer avenues that are there for kids within India outside India as well and parents may not really have thought through that that the child might want to do that. So I mean just to give an example you know doing a undergrad degree in India could probably cost you 15 20 lakhs whereas if you want to do this overseas it can cost you anywhere from a cr upwards I'm I mean depending on the country that you're going to and especially if you're going to the US a 4-year degree is going to cost you somewhere around 3 crores.

[00:03:16]So I do think most parents underestimate it but I think a good starting point for any parent with a newborn would be to have at least a 50 lakh target.

[00:03:28]>> Okay 50 lakh target over there. Uh Marin thanks so much for that. Uh you know Abisha coming to you what's your view coming in here as well? what's the corpus you believe a parent should have of a newborn who's uh you know looking at a target and also you know data has shown that for the same 3,000 monthly SIP over 15 years mutual funds deliver the highest corpus followed by NPS vatilia then you have PPF you have SSI that's Samriti Sukanya scheme um is the debate over or does rock size miss the real story right now what is your view on both these points >> so I'm glad to be back guys and thanks for having me here. Uh in the sense just a small correction in matter of preference uh I would still suggest Sukanya Samriti over PPF because in terms of return ratio uh it is better than PPF. Now coming to the 3,000 a month kind of uh let's say investment uh and then for next 15 years with this I mean let's say equity mutual fund gives a average return of around 12%. For this period they could end up getting 15 odd lakhs whereas same amount let's say in NPS watalia at 10% would be around 12 and a half odd lakhs whereas sukanya samridi would be say 10 odd lakhs and then ppf also a little bit less around 9.5 odd lakhs. So uh on a corpus basis mutual fund do win by a wide margin but debate is not far from over because uh this is doesn't cons consider three things like uh because the numbers are there uh people completely forget about the guarantees which comes with something like a severe back p or suka samriddi which are near uh kind of certain returns. Uh whereas mutual fund figure is an assumption that market as you know owes us nothing. Uh second part is the volatility part of it. uh as we saw in the uh covid crash uh wherein the index falls very quickly in quick secession. So if that happens the year where your child is ready for graduation an equity only plan could take a worse kind of hit in that sit situation which we call sequence of return risk. So that is something most of people are not prepared for. So we always advise that uh before uh let's say the graduation uh I mean when they are closer to the goal date u at least one or two years before that they should consider this sequence of uh return risk and start moving toward that product. So it's it I mean there is no straightforward answer that this should be the preference uh in terms of uh let's say investing for the kids education.

[00:06:00]>> Take that point. So there's an interesting table that you've put out what the corpus would look like for different investment avenues. What's your take here um Ren when we talk about the raw number uh what is the corpus that would look like um does that miss the real story uh when we actually look at those numbers?

[00:06:17]>> Yeah. So I I agree with what Abhishek says that you know the reality can pan out very differently um because for one that you know while the mutual fund shows you a very good return and possibly the highest corpus the question really remains whether people are going to be able to remain invested for that 15 or 18 year period. Yeah. And as we all know that there is a tendency to choose uh recent performers or you know chase some trending products or you know possibly look at exiting also when markets are down. So given the investor behavior that we see all the time continuing across market cycles, uh the question really remains that you know even if you know that this product is going to possibly get me the best corpus, can I actually remain invested and and and you know this is where the logged in products uh basically help with better investor behavior because since the money is logged in you you really cannot exit. But of course the issue with some of the locked in products like for example PPF or Sukanya Samriti that while on their own the return is great it's taxfree it's risk-f free and all of that but given the fact that the inflation on education is between 9 to 11%. They might really fall short in terms of the corpus that one needs to build. So I think I think I you know well what I would like to say is that I certainly the mutual fund is a great bet but you need to have the discipline to hold on to that particular bet for that investment time frame.

[00:07:49]>> Mhm. Point taken there. you know Abhishek just taking this point forward I want to also understand mutual funds they give the best returns completely flexible as well while PPFS SSY that's some of the uh sukanya scheme NPS there is a bit of that uh you know lock in periods that come in so does that actually help an average Indian parent in terms of being disciplined given that the lockin is there or is it worth to look at mutual funds giving which are giving you extra returns with that flexibility So I agree with Marin on this and you as well. So I would suggest always a kind of a hybrid strategy go with some amount of let's say sovereign guarantee uh in terms of return ratio uh there but the return ratio might not be able to beat the inflation that we're talking about here. So in that sense uh I mean based on their comfort level have a decent amount of allocation into equity as well and use uh these summer and guaranteed products as a kind of a uh balancing act so that they can have a kind of a uh situation where they're not taking too much of market risk also for these goals and they are also not going with too much subpar return as compared to the inflation that they might be facing. So I mean there's no clear-cut one product answer here. So it's I mean in our view limited view is that should be a hybrid view or let's say strategy aligned to this.

[00:09:12]>> That's b the basic uh scheme of portfolio diversification right don't put all your eggs in the similar basket.

[00:09:18]Uh so now when we're talking about these different eggs let me talk about NPS it's not very old it's a recent scheme that came by I think two years back um it only allows withdrawal of up to 25% of the corus three times maximum before the child turns 18 for education illness or disability. The rest actually stays locked in till the child turns 60. Is it genuinely an education corpus tool or is it actually retirement instrument only?

[00:09:40]It is being sold to parents on an education premise.

[00:09:45]>> Uh this question is for >> it is to it is for >> okay. [laughter] So uh well yes uh you know while it has been sold as an education tool I don't think it can really serve that purpose and it does have certain limitations because one only if the corpus is below 8 lakhs I think you can withdraw the money 100%. But in all other cases 80% of the funds need to be annotized which means that there's going to be some amount of regular income coming in for the child for the rest of the life and only 20% can actually be uh can can be actually withdrawn. So I think you know today as a parent myself I would say that the key concern for any parent would be to be able to provide for that particular corpus whether it is for undergraduation or post-graduation and I don't I don't know how many parents are going to be really interested that the child is going to get like a regular income through life or you know plan for their retirement right so I I I believe that the product has this pension limitation and the fact that you cannot withdraw the funds I think that's a huge limitation um on that particular product and you know I've actually written a lot about this that what we really need is some sort of a 529 equivalent plan in India where you contribute and then you know you have the flexibility to remove the money towards education purposes at the time of need >> point taken there but uh you know we're going to continue this conversation before that we have to actually slip into a very short break viewers Don't go anywhere. We'll come back and continue with Marin as well as a vish.

[00:13:57]Welcome back to MF Corner on CNBC TV8.

[00:13:59]We still have with us Shik Kumar as well as May Nagaral and we're discussing how maybe we can look at investing to beat education inflation what are the ways what are the strategies that you can have right uh Abishek let's take the discussion forward right so Samrudi scheme that offers 8.2% 2% taxfree and this is only for girl children right ppf that offers 7.1% tax free matures in 15 years and uh is available to all you know all the kids over there now given that education inflation that's much higher than the return that we're getting in these schemes you said that you know hybrid is the best way to go but is there a solution that if someone is in isolation investing in any of these maybe that is a there is a way to solve the problem or you still hold hold on to hybrid strategy. So I would still uh hold on to the hybrid strategy vinnie uh because both SARDI as well as PPF I mean solve for a part of the uh problem but they do not solve for uh the entire problem of funding the education right because as you rightly said I mean with this uh rate of return uh and let's say uh I mean education inflation at 10 11 odd% they would be I mean kind of uh below the uh let's say par in terms of return ratio when we talk about 8.8.2% 2% from Sika Samridi and PPF at 7 odd percent. So uh the fund would be kind of every year lagging behind at least two to four uh two to 5% and uh I mean that could lead to a uh underfunding of the education goals. So uh in still uh I mean my limited view uh hybrid is the way to go because I mean just with pure sukanya samriti or ppf would not be able to meet the number uh just on pure return ratio. uh there should be uh investment in other uh let's say avenues apart from these two so that they can kind of balance it out in terms of underfunding of the education goal from other uh source of returns.

[00:15:54]>> So it is capital save but it does but it guarantees future shortfall and that table was very interesting where we compared the returns with uh education inflation and how it is actually a decline that you will see. uh Min your thoughts on the same and uh the other part that comes into this why are we even looking at Sakanya Samrid or PPF because there is a tax exemption so while mutual funds are winning on gross returns the LTCG is still at 12 a.5% which is actually a real drag now while the others are completely taxfree when you run the post tax inflation adjusted numbers how much of a mutual fund advantage actually survives to the finish line uh in that case I agree hybrid works but then will mutual funds continue to get a bigger chunk there.

[00:16:38]>> Oh yes. I mean I still think that on a post tax basis the mutual funds are still a better option compared to Sukanya Samriddi or PPF and of course you know when you look at NPS Vatalia also right given the fact that the 80% gets annotized and annuty is completely taxable. Of course we can argue that you know in the initial years the tax would be lesser for the child but once the child starts working of course you know they might be at a higher tax bracket and the other piece I think what we are actually missing out also on NPS vatsia is the fact that the annuality that you will get will typically be slightly lower than the regular annuity right because uh because of the fact that you know the annuality has to be paid from the age like right from 18 onwards for life I think the annuity percentage is also going to be lower. So I think net net from that perspective uh the mutual funds like on a post tax basis I still think that the mutual funds do have an advantage.

[00:17:36]>> Mhm. Abishek your thoughts on the same as well.

[00:17:39]>> Yeah I'm broadly in agreement with me on this. So yeah so I'm aligned with her thought on this.

[00:17:46]>> Okay take that point. So uh there is alignment on that. Uh but um you know the PPF majority that's happening in 15 years. So Samr matures when the girl turns 21 and NP Swatelli locks up most of the corus till age 60. Mutual fans have no maturity. Education money is needed at age 18. So in that case which is most naturally aligned with when the money is actually required or how do we structure it? Let's put it that way.

[00:18:13]Hybrid model yes but how do we structure it? How much of the proportion should go to each? Abishek let me start with you and then come in on this. So I would uh say based on the risk appetite of the parent parents who are investing uh they should allocate a larger chunk of uh this uh let's say portion into equity mutual fund uh and then some balance out to let's say on the debt part of the portfolio they can invest in let's say something like a ppf or sukanya samriti if it's a girl child so uh it would all entirely depend upon the kind of risk appetite the parents have if their risk appetite is such that the allocation to equity would not be able to meet uh meet the number then I would suggest to increase the monthly allocation uh so that they can arrive at a I mean decent corpus or the corpus that would be able to meet the education goal for uh the kids. Mhm.

[00:19:02]>> Uh M your thoughts on the same as well.

[00:19:06]actually you know if the parents risk profile permits it um I would say that do equity mutual funds because see again the issue with sukanya samriddi is that at the age of 18 only 50% of the accumulated corpus can actually be withdrawn right so there is a limitation over there in terms of the amount of corpus that one can actually withdraw in sukanya samriti as well and hence you know I would say that I think this is one area again harping on the fact that the inflation is 9 to 11% on education.

[00:19:40]I think you know parents possibly would need to look at like even if their risk profile is conservative somewhere they will have to give a thought on you know for this particular goal is it possible for them to take higher risk simply because of the education inflation numbers.

[00:19:57]>> Okay. uh that is something that uh everyone has started talking about even when uh you know the kid is not old enough to go to school uh that's how big this inflation is a topic of conversation um so same ren a parent has just had a child they can invest 5,000 a month the sole goal is a copus accessible at age 18 for higher education no jargon no hedging what is the single best recommendation and what would have to be true for a different answer to be correct >> I would just say that If um you know you you've just had a child, you want to invest for the child, the one thing that you should not do is of course buy those child plans from insurance companies, you know, because that's what often happens that everybody around you will be like recommending saying take one of these child plans and all of this. So first thing is, you know, while we're talking about what you should do, we should also talk about what we shouldn't do. So that's one thing that we shouldn't be doing. Um I would say that um if you can look at an actively managed midcap fund that's my choice because you've got 18 years to go you've you've got a longerterm time frame you can take the risk um I think again given the corpus given the inflation it is a risk that you have to take so certainly I my first choice would be an actively managed midcap fund if the investor finds it really difficult to figure out what fund to buy uh what to do then a simple le just a simple nifty50 index fund is also a good choice that they can make for the long term. So I would say this is my option. The only thing that can change it is that if the investor is really conservative doesn't want to take risk then I would say look at the sukanya samriti scheme.

[00:21:39]>> Okay don't want to take risk then suka samriti scheme but otherwise you can look at an actively managed fund or even uh the nifty50 index is what you could look at that's the word from min. But uh Abhishek what would be your recommendation? What would you suggest?

[00:21:55]So on similar lines but I would suggest a lowc cost diversified equity fund something like an index fund as Ben was also saying or a flexi cap uh fund so that they can get exposure across market caps u and then they can earmark for their kid education and kind of try to automate it and not to pause it for any reason uh and shift to gradually as I said at least one or two years before the uh required uh year so that they can park this money in safe instrument like a liquid fund such so that they can protect their gains and meet the requirement as it comes. Uh I will also say that uh if you have a daughter and you deeply uh kind of look forward to kind of a guaranteed return then only invest in Sukanya Samridi because as we discussed before the returns are not going to be able to meet the kind of inflation they would be facing. So just these two uh I think would be a good starts.

[00:22:47]>> So uh the interest that you're getting 8.5% of Sukanya Samradi scheme that's taxfree right? So that's basically regular income on your capital. Um uh that that is not so much for education but for other purposes. Is that what you're suggesting?

[00:23:02]>> Uh it's actually 8.2.

[00:23:05]>> Yeah. And then yeah as let's say not the entire corpus would be available at the time of graduation.

[00:23:11]>> So p primarily plan with other source of let's say funding as well as we just spoke about having a hybrid strategy and such.

[00:23:18]>> Sense. uh quickly Min if you can tell us so multiasset allocation funds would that fit the uh fit the uh portfolio since we spoke about flexi cap what about multi-asset uh uh segment >> uh no not really I think I would still prefer a flexi cap like you know the reason that I suggested a midcap is because again you know when we look at the historical return especially when you look at 15 year plus periods you've seen midcap funds doing really well and of course it is a high-risk strategy that I have suggested but if not midcap you know but the second choice of course would be a nifty50 or a flexi cap fund I'm actually not a big voter of the multiasset allocation funds in any case >> okay point taken there as well as a you know thank you so much for joining us this afternoon on the show uh explaining our viewers maybe how they could look at investing in some sort of way to beat that inflation as well but uh thank you so much for joining in this afternoon on that note viewers we are absolutely out of time on this edition of MFON owner.

[00:24:19]But uh remember to email us your queries or even send us your queries on the phone number that will be on the screens for you all. We'll address them with our experts on Tuesday. So stay tuned in for that. But the last hour of trade is still left and for that you have closing bell up next.