A Parent's Guide to Wisely Funding Your Child's Education

July 11, 2025

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Investing in your child's education is not a "set and forget" activity. The plan that works when your child is a toddler will not be effective when they are on the verge of entering college. The secret to success is learning how to know when to transition from making your money grow to holding it secure. This article will give you a staged method for managing your investment portfolio so that the money is there when needed without last-minute panics.

Phase 1: The Growth Phase (10+ Years Away)

Objective: Maximise Returns Through Equity Exposure

When college is still over a decade away, time is your biggest strength. This is the time to be aggressive with your investments and pursue assets with high growth prospects. Fixed deposits are a common choice, but that might not be the best tool here.

The main focus for this phase should be investing in direct stocks and equity mutual funds according to the risk profile. In a long-term horizon of 10-15 years, equities have historically yielded returns that can easily exceed inflation by a wide margin, letting your money accumulate exponentially by the compounding effect. The natural volatility of the stock market is not as significant an issue in this period, as your investment has ample time to recover from any losses.

• Example: If the child is 5 years old, initiating a Systematic Investment Plan (SIP) in a diversified equity mutual fund is a wise move. For making a balanced portfolio, this may be followed by investment in safer, long-term avenues. For a daughter, the Sukanya Samriddhi Yojana (SSY) is a great option for yielding high, tax-free returns. For a son, a Public Provident Fund (PPF) account acts similarly by offering stable, tax-effective growth.

Phase 2: The Consolidation Phase (3-2 Years Left)

Objective: Preserve Gains and Reduce Risk

When you are just 2 to 3 years away from needing the funds for your child’s education, it's time to begin shifting your focus from growth to capital preservation. This is a crucial transition point in your investment journey. The objective now is to protect the corpus that you have built up. Leaving a substantial corpus to continue facing the vagaries of the equity market at this juncture is a gamble with high risks. A practical method of de-risking is to take your money systematically out of equities and into debt instruments.

Begin gradually reducing your exposure to equities and move funds step-by-step into more stable instruments such as hybrid funds and debt mutual funds. This is also the right time to start budgeting for upcoming costs like tuition fees, travel, or accommodation expenses, so that you're financially and mentally prepared for what lies ahead.

• How to Shift Investments Smartly

Use a Systematic Transfer Approach: Don’t switch all your investments at once. Instead, use a Systematic Transfer Plan (STP) or make manual gradual shifts every few months. This staged transfer strategy reduces the risk of poor timing and ensures a smooth transition from riskier to safer assets. For example, shift from equity to debt starting 3 years before the goal, then from debt to liquid funds in the final year.

• Example: Suppose you have created a corpus of ₹25 lakhs in equity schemes, and your child is four years from entering college. To safeguard this amount, you can start a Systematic Transfer Plan (STP). An STP systematically shifts a specific amount of money at periodic intervals from one fund (your equity fund) to another (a debt or hybrid fund that is relatively safer). By transferring, say, ₹70,000 every month, you progressively lock in your profits while lessening your exposure to market risks systematically.

Phase 3: The Safety Phase (The Last 2 Years)

Objective: Focus on Stability and Access

During the last one or two years preceding the need for the funds, the investment dictum should be "Safety First." High returns do not matter at this stage; what is important is that the precise amount of money you will need is safely stashed and within easy. At this stage, move most of your investments into pure debt mutual funds. These funds are relatively stable and better suited for capital preservation while still offering modest returns. Avoid making any new investments in equities now, as the risk-to-reward ratio becomes unfavourable this close to the goal. The key objective is to ensure that the funds you've built are shielded from volatility and are safely parked in low-risk instruments that maintain liquidity and value.

• Example: Suppose you are planning to spend ₹10 lakhs on the first year's fees and expenses. You must invest this whole sum in the likes of liquid funds or a fixed deposit well in advance, i.e., one year in advance. This insulates the money entirely from market fluctuations and allows you to withdraw it at short notice to settle fees or make payments, giving you total financial peace of mind.

Phase 4: Final Year (0–1 Year Remaining)

Objective: Ensure Liquidity and 100% Safety

As you enter the final year before your child’s education expenses begin, the most critical priority becomes safety and liquidity. At this point, the focus should no longer be on returns but on ensuring that the funds are fully protected and immediately accessible when needed.

Shift the entire remaining corpus into ultra-safe and liquid instruments such as liquid mutual funds, high-yield savings accounts, or short-term fixed deposits. These options offer stability while allowing quick access to your money without the risk of capital loss.

All equity exposure should be fully exited by now. Staying invested in market-linked products this close to your goal can expose your corpus to sudden downturns, which could derail your education funding plans. The aim is to ensure that the required amount is ready and available for fee payments, travel costs, and any other immediate obligations, giving you peace of mind at this crucial juncture.

• Example: Suppose your child is set to begin college in the next 6 months, and you’ve accumulated ₹12 lakhs for the first year’s fees and related expenses. To avoid any last-minute shocks due to market volatility, you move the entire ₹12 lakhs from your debt mutual fund into a liquid mutual fund or a high-yield savings account. This way, the funds are fully secure and can be withdrawn instantly when needed for paying tuition, booking accommodation, or covering initial travel and settlement costs.

Supporting Strategies

• Build an Emergency Buffer: As you near your child’s education goal, it’s wise to set aside a separate emergency fund to handle unexpected expenses. This fund acts as a financial cushion, ensuring that unforeseen events such as medical emergencies, last-minute travel costs, or sudden currency fluctuations for overseas education etc. don’t force you to dip into the carefully planned education corpus. Ideally, this emergency fund should cover at least 3 to 6 months of household expenses and be parked in easily accessible, low-risk instruments like a savings account or a short-term fixed deposit. This way, your education fund remains untouched and fully available for its intended purpose.

• Maintain Diversification: Even when you're becoming more conservative, it's still important to diversify. Spread your investments across different instruments like debt, gold funds, liquid funds, etc. Also, diversify within each category (for example, mix government and corporate bonds). This lowers the chance that one bad investment will spoil your whole plan.

• Seek Professional Guidance if Needed: If you're unsure about how to manage this transition, take personalised guidance from a financial advisor. They can help create a plan that suits your needs, timeline, and comfort with risk. Even if you don’t use a professional, make it a point to review your portfolio regularly and adjust as needed.

Your Child's Roadmap to Educational Success

Planning for your child's education is a process that requires foresight and flexibility. It can be simplified by dividing it into specific phases, which will help you navigate it successfully.

●The Growth Phase (10+ years out): Prioritise wealth generation via equity SIPs, supplemented with safe funds such as PPF/SSY.

● Consolidation Phase (3-2 years ahead): Start shifting from risk to safety. Implement an STP to transfer funds sequentially from equities to debt instruments as it reduces the timing risk and lock in gains while maintaining some growth potential.

● Safety Phase (2-1 years ahead): In the last 1–2 years before the goal, focus entirely on capital protection and liquidity. Shift your corpus to stable, low-risk instruments like debt mutual funds and avoid equity exposure.

● Final Year (0-1 years remaining): In the final year, exit all equity investments and prioritise complete safety and liquidity. Park the entire corpus in ultra-safe, easily accessible instruments to avoid any last-minute risks or delays.

By matching your investment plan to your timeline and periodically reviewing your portfolio, you can create the corpus required and ensure that when your child is eligible for their dream college, so are you. You may also use our simple and free guide to investing to jump-start your journey.

-Sukalyan Halder & Akshit Bajaj

-Dayco India

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A Parent's Guide to Wisely Funding Your Child's Education

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