The best gift you can give your child is a ‘good education’ that secures his/her future. It is a scary thought for any parent to leave his/her child without adequate means for education in one of the best colleges or universities. But most of the times, the ‘best’ colleges come with ‘high’ price tags. Most of the Indian parents plan for their child’s education by investing in an unstructured manner. They randomly put money in a generic financial product like fixed deposits or a mutual fund, without understanding how much would they require when the child is ready for his/her graduation.
Being financially prepared for your child’s education is not as easy as earlier. Today’s scenario is very different, the education costs are rising, competition has increased manifolds, education is more globalised with specialised coaching to get into a good college, all of which is very expensive. Despite being aware of this, most parents neglect the importance of child education planning, which results in parents having to take significant amount of loans at the time of need, which affects the savings they have made for their retirement and also impacts the personal budget of the family.
The investment options before you will depend on the age of the child. If the child is 3-4 years old, the investment choices and strategy will be different than for a parent whose child is 15-16 years old. Therefore we design the most appropriate investment options for three broad age groups and the strategies to be followed at each stage. Choose the one that fits your situation to achieve your dreams for your child’s higher education.
1) Age of Child : 1-7 Years
The benefits of an early start cannot be stressed enough when you are saving for a long-term goal. If your child is 3-4 years old, you have a good 13-14 years to save. Starting early helps you amass larger sums that may not be possible later in life. “The multiplier effect in the power of compounding comes from the investing time horizon; longer time horizons have a higher multiplier effect.”
Starting early also put lesser burden on your finances because it requires a smaller outflow. For instance, if your target is Rs 25 lakh, you need to save only Rs 5,004 a month if you start now. But if you wait for six years, you will have to invest Rs 9,195 a month to reach the target. Wait for three more years and the required amount jumps to Rs 23,875. Worse, you may not be able to invest in certain assets if the time horizon is too short. “If you delay investing, not only do you have to invest a higher amount every month, but it also reduces your ability to take risks,”
2) Age of Child : 8-12 Years
The investment strategy changes if your child is a little older. Since you have only 5-9 years to save, the risk will have to be lowered. The ideal asset mix at this stage is 50% in Equity and 50% in debt.
For the debt portion, start a recurring deposit that would mature around the time your child is scheduled to apply for college. If you are in the highest 30% tax bracket, avoid recurring deposits and start an SIP in a short-term debt fund. These funds will give nearly the same returns as fixed deposits but are more tax efficient if the holding period is over three years.
It is also important to review the progress of your investment plan. “You should check every year if you need to step up your contribution towards the higher education kitty,”. “At times, you may put in a lump sum investment even if you have a SIP running.” Keep monitoring the cost of education on a yearly basis and accordingly adjust your investment requirement.
3) Age of Child : 13-17 Years
For parents of teenaged children, the investment strategy should focus on capital protection. With the goal barely 1-4 years away, you cannot afford to take risks with the money accumulated for your child’s education. The equity exposure at this stage should not be more than 10-15%.
This shift from growth to capital protection is critical. The 3-4 percentage points that equity investments can potentially give is not worth the risk. A sudden downturn in the equity markets can reduce your corpus by 5-6% and upset your plans. “As you come closer to your target, you should stop SIPs in equity funds and shift to a short-term debt fund,”
As mentioned earlier, the cost of higher education is shooting up. Many parents who started late or chose the wrong investment vehicles may find themselves woefully short of the target. If you face a shortfall, don’t be tempted to dip into your retirement corpus to fill the gap. This is a mistake.
“Your retirement should be given priority over your kids’ education. Instead, you should take an education loan with the child as a co-borrower. Apart from keeping your retirement savings intact, it will inculcate a savings discipline in your child after she takes up a job. The repayment starts after a 6-12 month moratorium when she completes her education. Banks offer loans of up to Rs 20 lakh for courses in Indian institutes. If your child is keen on a foreign degree, it would require a larger corpus. While banks are willing to lend up to Rs 1.5 crore for foreign courses, they insist on part funding in the form of
When saving for your child’s education, do remember that the whole financial plan depends on regular contributions by you. But what if something untoward happens to you? The entire plan can crash. The only way to guard against this is by taking adequate life insurance. A term plan does not cost too much. For a 30-35 year old person, a cover of Rs 1 crore will cost barely Rs 10,000-12,000 per year. That is too small a price for something that safeguards your biggest dream.