Save for Their Future
A five-step plan to help you invest in your child's education
Sample this. According to a 2015 Assocham Social Development Foundation survey, the cost of private school education in India has risen by a whopping 150 per cent in the last 10 years. While professional education has also become expensive, education inflation is spiking steadily, at the rate of over 10 per cent every year.
Speaking to 1,000 parents across 10 cities, with kids ages four to 12, a 2015 Nielsen survey found that children's education was the top financial priority for 83 per cent of surveyed parents. According to the Assocham poll, over 70 per cent of parents spend 30-40 per cent of their take-home pay on kids' education. Planning in advance makes it less daunting. It's all about being prepared, so follow these steps and ease your worries:
1. Set your goal
Have a concrete plan to prepare for your child's future. Tell yourself, "I have to save for my daughter's law degree." Consider the time horizon: While planning you will know when the cash will be required.
2. Determine the cost
There are several websites that can help you calculate the estimated future expenses, factoring in inflation, for different streams of education. Try agencyonline.sbilife.co.in/childeduplanner, hdfclife.com/financial-tools-calculators/child-education-expense-planning-calculator or iciciprulife.com/insurance-guide/financial-planning-tools-calculators/child-education-calculator.html. This will help fix a realistic target. Overseas study will mean a bigger corpus.
3. Pick an investment option of your choice
This is a very crucial step: Depending on your financial product knowledge and risk appetite, you can opt for equity, debt or a mix of products, such as a balanced fund, which has both equity and debt components.
Says Raghvendra Nath of Ladderup Wealth Management: "We generally have 15 years in hand to invest in children's education. And when it comes to long-term plans, equity is the best asset class to rely on." However, it is imperative that parents possess a good term insurance plan before investing in a mutual fund so that, in case of an eventuality, the child's education is not hampered.
Chandresh Kumar Nigam, managing director and chief executive officer at Axis Asset Management, notes that it is important to have a multi-asset investment approach to tackle high inflation. For this, he advocates a balanced mutual fund. "Data shows that balanced funds generate returns close to equity funds," he explains, adding that the money is invested across equity and debt, lowering the risk considerably.
Gaurav Mashruwala, financial planner and author of Yogic Wealth, cautions against child plans as they generally have a lock-in period. "During this time, withdrawal of funds may not be possible. Even if the scheme is not performing, you need to wait for the lock-in period to end. Often parents opt for child plans to make up for the lack of financial discipline and to keep the commitment of investing in their child's future. They should ideally invest through SIPs of open-ended mutual fund schemes to gain optimum returns," he says.
Mashruwala points to the Sukanya Samriddhi Yojana (a government scheme), which encourages parents to build a fund for their daughter's education and marriage, as another option. It offers tax benefits and parents can open accounts in post offices or scheduled commercial banks in the name of two girl children up to 10 years of age.
While saving, Mashruwala suggests the following thumb rules:
- If your child needs the funds between seven and nine years, opt for schemes that invest in the equity market; for example, an equity mutual fund.
- If your child is likely to need money in the next two or three years, choose a scheme that invests in debt (bonds, debentures, fixed deposits, debt mutual funds, and so on).
- For requirements in the interim period, opt for a combination of equity and debt schemes.
If your corpus is generated ahead of time, it's advisable to withdraw a part of the investment and park it in a fixed-income product. This way, any shocks in the equity market in the last year of investment will not hamper the savings.
4. How much to invest
Calculate how much you need to spend every month. For example, you can accumulate Rs 38 lakh over a period of 15 years by investing Rs 10,000 every month in an equity mutual fund, at an assumed return of 9 per cent, depending on market conditions. The higher the cost of education, the more you will need to save.
5. Do not forget yourself
Meanwhile, plan for your retirement, adds Mashruwala. "Do not get carried away and compromise on other equally important financial goals. Parents who set aside even a small amount when the child is young are able to create a sufficient corpus. The key to meeting your financial goal is to start early, invest regularly and stay invested for a long period," he says.
Adapted from Money Today (January 2016). Copyright 2016 Living Media India Limited.