Mutual funds investing: Can index funds be the best option for your child’s future?

he arrival of a child brings joy, but also poses a big question; what about your child’s future? It will be a long time before your child crystallizes his/her career goals, but it will certainly entail a big investment and needs planning. The thumb rule; is with more than 10 years to the child’s career start, leverage equities.

“Direct equities may be complicated, so equity funds are a better option. Which equity funds do you reach out to? Sectoral funds are too risky for a serious goal. Mid-cap, small-cap, and value funds are too thematic. You are left with large caps and multi-caps. One option is index funds, although you must restrict to generic indices like Nifty 50, Nifty 100, Sensex etc.,” said Nehal Mota, Co-founder & CEO, Finnovate.

One can choose Index funds for their child’s future planning because firstly, you avoid the risk of fund manager bias and if you have limited time to actively monitor your portfolio then an Index fund is a good option. Secondly, they are also cost-efficient. Lastly, Sensex has given around 16-17% CAGR over the last 44 years.

Abhishek Banerjee, smallcase Manager and Founder at Lotusdew, said, “Nifty has dislodged China as the largest country in MSCI EM and is hitting all-time highs with 2 active wars. This shows that India is becoming a safe haven instead of an emerging country where money is flowing in to keep it safe and out of conflict. While India’s account deficit is also hitting an all-time high, we are sitting on the highest forex reserves too. The ability to cut rates to weather any shocks, corporate private capex on the anvil and record inflows from SIP – India looks to be a great place to be invested in.”

How have index funds performed in India. The table below captures the story.

Data Source: AMFI

The above ranking is on 10-year CAGR returns. The top-5 average CAGR for 10 years is 14.17%, which would be about 13% net of tax.

“If you start when your child is 2, you have a full 15 years to fund his/her education goal. Even with a monthly SIP of Rs 20,000; you gift him/her a corpus of Rs 1.04 crore at the age of 17, just with index funds. The secret is to start early and persist with the index fund SIP and step up if possible. Focus on time in the market; the timing will take care of itself,” said Mota.

Investing in index funds for child future planning can be a prudent choice, especially given the long-term nature of such goals. Equity, as an asset class, has historically outperformed inflation over time, making it suitable for building wealth. “Index funds offer a low-cost entry into equity markets due to their low expense ratios. This, combined with the tax efficiency of mutual funds—since taxes are only incurred upon withdrawal—adds to their appeal. However, investors should be mindful that index funds, like other equity investments, carry market volatility risk, which must be balanced with long-term investment horizons,” said Atul Shinghal, Founder and CEO, Scripbox.