Education costs have shot up through the roof in the last couple of year. Today a 4 year engineering course in a reputed institution costs you nothing less than Rs.10 lakhs. This is just the tuition fees for the course. You will have to factor in additional costs like hostel charges, cost of books and extra activities, incidental expenses and if all these added up your actual cost can be nearly Rs.20 lakhs for a 4 year engineering course. Then there is a post-graduation education which will cost you nothing less than Rs.20 lakhs for a 2 year course. Incidental expenses will be on top of that.
Effectively, if you want to give you child a good education within India, your total investment will be nothing less than Rs.60-70 lakhs. All this pertains to a domestic higher education. If you are looking to educate your child abroad, then the actual cost will be nearly 3 times this amount. Remember, all these expenses are at today’s money value. If you are looking at the future then you also need to also factor in the annual cost escalations. The moral of the story is that a good education really requires a large investment and you need to be prepared for it. More importantly, you need to plan for it well in advance.
The above costs represent merely the cost of education. If you add the amount you need to spend on your child’s marriage befitting your social status there is a huge gap that you need to fill. The time to start planning is now. Here is how to go about it!
The earlier you start the better it is..
That is the golden rule of planning for your child’s future. The earlier you start, the more your save and the more you save the more your savings earn for you. In financial parlance this is referred to as the Power of Compounding. The more time you have at your disposal, the more the power of compounding works in your favour. Consider this example… if your child is currently 3 years old and if you plan to accumulate Rs.60 lakhs by the time your child is 18 years of age, then you need to save just Rs.12,000 per month to achieve that dream. The later you start, the higher the monthly savings required. This difference due the power of compounded can become more pronounced as the time period prolongs.
If you have time in your favour, put at least 80% in growth assets
Don't try to play it too safe when it comes to planning over the long term. Equity and equity funds are best suited to outperform over the long term. If you have a 15 year time frame there is no point in putting 60% of your money into debt. You must look to put at least 85% of your money into equity and equity funds. Even an index fund would have given you about 14% returns on an annualized basis over a 15 year period. If you invest in debt you are limiting the potential of your money. All long term investment plans should be predominantly build around equity.
Look at a graded approach to enhancing your investments
While we have used the example of static investments across the 15-year time frame to make the example simpler, in reality things do not work that way. For example, with the passage of time your business grows or you will move up the hierarchy. The point is that your earnings will grow as time passes by. You need to work out in such way that you keep allocating higher amounts each successive year to ensure that certain proportion of your income gets transmitted into long term savings. So if you start off planning for your child’s education with a fixed outlay and enhance the contribution each year then you could end up with a much bigger corpus at the end of 15 years.
Be liberal when it comes to planning your future costs
Remember, when you plan your future expenses you need to plan for escalations. Escalations could happen for a variety of reasons. Firstly, there is inflation that leads to higher prices. Secondly, many prestigious degrees were underpriced in India and that could also go up sharply. Don’t just apply the rate of inflation. For example the cost of higher education has gone up four-fold in the last 10 years. Remember, when you are planning to send your child abroad to study, you also need to provide for the weakness of the rupee as that too will make a difference to your outflows.
Look at a trade-off between risk and return on your investments
Planning for your child’s future is not just about returns but also about risks. Here are a few pointers. Equity mutual funds offer a good way to plan your child’s future in the long run. But you must avoid the temptation of sector funds and thematic funds as they can add concentration risk to your portfolio. Prefer the stability of diversified equity funds. Secondly, you need to tweak the equity / debt mix as you go along. When you have 15 years to your child’s education it is ok to remain 85% in equities. But if you are just 2 years away, then it is advisable to shift a substantial portion of your portfolio into debt.
Insurance should be a critical part of your child future planning
Last, but not the least, don’t forget to attach insurance to your child’s future planning. This should be distinct from the normal insurance covers that you have. The insurance policy should be designed in such a way that even in your absence the child’s future plans should not be affected.
Planning for your child's future is not just about returns but also about managing risk. Above all, start early and let time work in your favour.