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With the rising cost of education in India, saving for your child’s education needs a disciplined and early start.
By Poornima Kavlekar
When our daughter was born 8 years back, exactly on the day I write this, we were more than elated, as every parent is. We were basking in the pleasure of having our little girl and didn’t think of anything else until she turned two. That’s when we began saving specifically for her education. We took an insurance policy from Life Insurance Corporation of India that will mature when she turns 18…in time for her graduation funding needs. But we could have started earlier.
My husband and I were wiser when our son was born two and a half years later. We opened a public provident fund (PPF) account, bought an insurance policy and even made a dedicated contribution into a diversified mutual fund, when he was just 4 months old. Starting early is the most important thumb rule when you are saving for your child or for anything else for that matter. But saving alone is not enough. Inflation erodes any savings and increases education costs. To have substantial child education funds, you need to invest the right amount, at the right time and have a good mix of investment options.
Here are a few steps that will help you get there.
It is critical to determine how much child education funds you will need. An easy way to do this is to ascertain the costs for various educational milestones (see Table 1).
Table 1: Milestone Monitor (child is currently 3 months old)
* approximately at today’s cost
Gathering the cost of education at school level is fairly easy. But when it comes to graduation and post graduation, get cost details of expensive courses such as medicine, management or engineering.
School education is normally financed by one’s regular monthly income. Saving for your child’s higher education is what requires more attention. While arriving at this target, take into account cost escalations in the future. So if the graduation needs are around Rs.6 lakhs today, then for a child who is currently three-months-old, after factoring in the cost escalation (at an average inflation rate of 8 per cent), the amount required will be around Rs. 24 lakhs, after 18 years.
Start saving for your child early: This helps your money grow better through the power of compounding. An early start also gives you the freedom to invest in aggressive investment avenues such as mutual funds and equities. Of course, the key is to invest the right amount in a regular and disciplined manner so that it outgrows the rate of inflation by the time you need the funds.
How much risk to take: Normally, while saving for your child’s education, we tend to avoid risks and opt for security. But do not ignore the fact that inflation will beat the growth of your education nest-egg. To outpace the growth rate of inflation, allow some equity into the portfolio.
What percentage of the child’s education fund should hold equity related products depends on your risk profile. As L Ravindran, Managing Director, Wealthmax Enterprises Management, a wealth management company, suggests, “The rule of thumb for determining asset allocation is to subtract one’s age from 90.” The result (90 minus your current age) is the percentage of the total assets that can be invested in growth-oriented products (equity and equity related) while the rest should be invested into assets (debt and other fixed instruments) which can offer safety, flexibility and liquidity.
Where to park your funds: If you are 30-years-old when you begin saving for your child, then you can park 60 per cent of your saving in equity and equity related instruments while the remaining can be in debt and fixed income instruments.
A good example of a secure investment option for higher education is PPF. A disciplined year-on-year investment of Rs. 20,000 in to the PPF account can yield Rs. 5.86 lakhs at the end of 15 years, a good amount to save if initiated at the time of birth of your child. You can open this account in your child‘s name.
Other secure investment options include fixed deposits, traditional insurance policies, debt mutual funds and post office savings schemes (with an expected return of around 7 per cent). You can also bring in balanced funds and monthly income plans to have a slightly higher rate of return when compared to debt funds.
In the case of growth oriented investments, you can look at equity funds (diversified and tax saving funds) and equity shares where one can expect a return of over 15 per cent, if the products are chosen with care. They do come with some amount of risk. But it can be stemmed if you opt for large cap stocks and diversified funds. Make sure you check the track record of the fund and the fund manager before investing. You can also invest in real estate and gold to beat inflation.
If you opt for the insurance route, start young. This will ensure low premium and better risk coverage. When choosing such policies (links to a few child-specific policies) look for one that provides a continuous stream of income to meet the child’s education. Preferably, time it in such a way that the payouts coincide with the milestones of your child. Also, ensure that the life cover is in the parent’s (or bread winner’s) name and not in the child‘s name. Ravindran also suggests, “Providing flexibility in premium payment and in redeeming monies will help.”
Redeploy funds: Once your child reaches 13 to 14 years of age or when the first major milestone is coming closer, the security of your principal and returns from the growth investments are very important. During this period, reinvest funds from growth investments into safer fixed income avenues. For example, if you find that the market is close to its all time high, (like it is currently), offload your holding in stocks and mutual funds and divert this fund into a fixed deposit. This will ensure safety and liquidity for your funds at the time when you need it. Growth oriented investments cannot be readily liquidated and strategic exit from these investments is prudent to ensure that your years of hard work are not wasted.
A proper game-plan will help your child pursue her dreams with no financial worries! And more importantly, it will also allow you to take care of your future retirement plans.
(Note: None of the products or entities mentioned here are in any way endorsed by the writer or by Women’s Web. These have been mentioned simply as examples and in order to provide more information to the reader).
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