Your child's college and post-graduate education is a major investment that you need to make during your life time. The cost of higher education has gone up substantially in the last few years and now it is genuinely an amount that needs to be meticulously planned for. However, financial planning for child is not just about growing your investments or making the corpus ready. It is also about planning the risks associated with the exercise and providing for the same. Here are seven things you need to remember on identifying the best investment plan for child's future..
Be pragmatic when you estimate future costs
This is so important these days. The cost of primary and secondary education has also gone up substantially in the last 20 years. The amount of money you spent on your entire education 30 years back is what you have to spend for your child in a couple of years of primary schooling. An Engineering or MBA degree can easily set you back by Rs.40-50 lakhs. If you are planning to educate your child abroad then it could cost 4-5 times that amount. Don’t use the plain inflation indexing approach. That has not worked in the past and will not work in the future. Be as liberal as possible when it comes to estimating education expenses into the future.
Start planning and investing early
Some of your friends and relatives may wonder why you are talking about college education when your daughter is just 2 years old. If you are worrying, then you are on the right track. The earlier you start planning for your child’s education, the longer you are able to save. The longer you invest, the longer your money earns returns and therefore the longer your returns earn further returns. This is called the power of reinvestment or the power of compounding and you must make the best use of it.
Use the power of equities to reach your goals
If you start planning for your child’s education early then you have more time on hand. That means you can leverage on the power of equities adequately. If you are looking at a 3-4 year goal, you obviously have to look at a mix of debt funds and balanced funds. But if you are planning for your child’s education 15 years in advance then you can afford to leverage the power of equities. After all, over time frames of more than 10 years equity funds have worked best in terms of risk-adjusted returns.
Go for the SIP approach to synchronize with your inflows
Don’t try to put off investing for your child’s future and ensure that you adopt a phased (SIP) approach. Apart from giving you the benefit of Rupee Cost Averaging (RCA), this SIP approach also synchronizes your investment outflows with your inflows. That reduces the pressure on your finances. See how the equity SIP can help you reach your child’s education goals very effectively if started early!
Planning for your child’s education corpus of Rs.1 crore in 2033SIP Starts in20182020202220242026SIP onEquity FundsEquity FundsEquity FundsEquity FundsEquity FundsTarget in 2033Rs.1 croreRs.1 croreRs.1 croreRs.1 croreRs.1 croreTenure15 years13 years11 years9 years7 yearsAnnual Yield15%15%15%15%15%Monthly SIPRs.16,224/-Rs.22,472/-Rs.31,703/-Rs.45,988/-Rs.69,754/-
The above table clearly illustrates that as you keep delaying the start of the SIP by 2 years, the SIP requirement keeps going up at a progressively faster rate. To get the best benefits of SIP approach, you need to start as early as possible for your child education plan.
Create time bound milestones and shift to liquidity accordingly
Why is milestone planning important. When your child gets admission into a reputed college then the money will have to be paid at regular intervals. At least 1 year before the milestone, the equity funds should be converted into either liquid funds or Short Term debt funds. You can take price risk around the time of the milestone. This will ensure that liquidity is available when required without any price impact risk.
Build insurance into your child’s future plan
The SIP sounds great on paper, but what if a calamity was to befall you in between? How will you ensure that the child’s plan remains unaffected? There are 2 ways to do it. Firstly, opt for a specialized child education plan offered by mutual funds which combines an insurance component also. If something happens to the parent then the child plan continues without any further contribution. Alternatively, take a term plan that is large enough to cover your SIP amounts too. But, don’t forget to build insurance for exigencies.
Monitor regularly and, if required, rebalance
The child plan once created has to also be monitored on a regular basis. Is the plan on track to meet goals or have the costs gone up more than anticipated? Are your investments delivering the assumed returns or are they underperforming? Based on your monitoring, you need to take a call on rebalancing the child’s education plan to make it more in sync with the market reality.
There are also education loans available but the terms are not too favourable and the rates of interest are higher that what you could get for a car loan. It is best you use the equity mutual fund SIP route to plan for your child’s future. Of course, ensure that insurance is embedded into the plan!