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Amit's 12-year-old daughter dreams of pursuing an MBA course from a reputed institute in either UK or USA when she grows up. Amit is very supportive of his daughter's dream but worries if he will be able to provide the financial support needed to give wings to his daughter's aspiration.
Like Amit, there are many parents who want the best of everything for their child, but they share the same worry.
If you want to plan for your child's education, we have the roadmap for you.
"An investment in knowledge pays the best interest." - Benjamin Franklin
Education is the foundation your child can take towards becoming independent and achieving success.
However, good things often come at a price. The cost of quality education at both graduation and post-graduation level is very high and continues to increase every year.
Therefore, you need to have a financial plan to be able to give your child a good quality education. If you start planning now, you will have enough investments for your child's education.
How to plan?
You can start by noting down the current education cost of various courses such as MBA, Engineering, Medicine, Dentistry, and so on.
As you cannot be sure which course your child will be interested in when he/she grows up, looking up the cost of various courses at graduation and post-graduation level will give you an estimate.
You can then calculate the future value of the costs involved. The future value needs to be calculated keeping in mind inflation (which erodes the purchasing power of your hard-earned money). Education inflation can be assumed at a rate of 10% (yearly).
If you are planning for your child's higher education abroad, the inflation rate of the targeted country should be taken into consideration. The country's inflation rate could be rising at a faster or lower rate than your home country and that may affect your budget.
Where to invest?
Mutual funds could be the best investment option when planning for your child’s education. Mutual funds allow you to invest systematically based on your goals, time horizon, and risk tolerance, which is crucial for long-term wealth-building. Other investment options such as bank deposit, PPF, other small saving schemes, in comparison, do not have such wealth-building potential.
[Read: Type of Mutual Funds for Your Child's Higher Education Needs]
If your investment horizon is long-term, you should have greater exposure to equity funds. Equity funds have the potential to give high returns in the long-term and can also counter inflation with ease.
After a few years, gradually reduce your equity exposure to create a balanced portfolio of equity and debt instruments. The equity part will give you high returns during the bull phase, while the debt part will provide some cushion when equity markets turn turbulent.
As you move closer to your goal, the equity exposure should be further reduced and exposure towards debt funds should be increased to reduce the risk of the entire portfolio. You can also hold a portion of the total investible surplus in gold, as a portfolio diversifier and hedge.
Table: How much to allocate between equity and debt for different investment horizons
|
Years to goal
|
Equity allocation (%)
|
Debt allocation (%)
|
Type of funds
|
|
More than 10
|
75-90
|
10-25
|
|
|
5-10
|
60-75
|
25-40
|
- Large-cap
- Large & Mid-cap
- Mid-cap
- Multi-cap
- Balanced/Aggressive Hybrid
- Medium/Long Duration
- Dynamic Bond
- Corporate Bond
|
|
3-5
|
40-60
|
40-60
|
- Large-cap
- Balanced/Aggressive Hybrid
- Liquid/Overnight
- Dynamic Bond
- Corporate Bond
- Short Duration
|
(Note: This table is for illustrative purpose only)
Mutual funds also offer Children's Fund --classified as solution-oriented-- which have a lock-in period of 5 years or till the child attains the age of maturity (whichever is earlier). Though the lock-in period will encourage you to stay invested, on the downside you will not be able to exit the scheme if it is consistently under-performing.
You should, therefore, create a mutual fund portfolio which includes a variety of categories and sub-categories to give you the benefit of diversification.
When the time horizon on the goal is nearing, i.e. 3 years or less, the investment should be shifted to safer avenues such as bank fixed deposits, liquid funds and/overnight funds.
[Read: Liquid Funds v/s Overnight Funds: Where To Park Your Short-Term Money?]
By following this strategy, you will be saved from taking education loans which generally leads to high financial costs.
How much to invest?
The amount to be invested will depend upon whether you are planning for graduation, post-graduation courses or both, be it in India or abroad, and if are you planning for the education of one child or more.
Apart from education, there are other expenses that need to be considered such as food and accommodation.
To determine the monthly investment that will be required, consider this example. If the current cost of education for a post-graduation course is Rs 10 lakh, its future value after 10 years would be Rs 25.93 lakh. For this, you would need a monthly SIP of Rs 11,163 assuming an annual rate of return of 12%.
If you start investing for the same goal with five years left, the cost of education will be Rs 16.1 lakh and you will need a monthly SIP (Systematic Investment Plan) of Rs 19,524. Hence, the early you start investing the better.
Selecting the right mutual funds is the key to achieving your goals on time. Don't just select the schemes based on star-ratings. Instead, select the scheme based on its standing under various quantitative and qualitative parameters.
Keep in mind to not utilize the money you've invested for your retirement or other long-term financial goals. Get yourself adequately insured (both life and health) so that your child's future is secure even if something unfortunate happens to you. Always reserve some amount towards contingency.
Remember to review your portfolio at least once a year and make changes if necessary. Step-up your SIP contributions whenever there is an increase in income or if you have a surplus amount in hand.
Editor's note:
Selecting the right mutual fund scheme for your portfolio is a skilful and time-consuming job. If you lack either or both of them, it's best to seek professional advice.
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