In a Financial Plan, there is always more emphasis on Child Education & Retirement. Child Education Plan majority times takes more importance if the inflows are limited. It’s always in mind – as it is one unspoken sacred vow. Child Education Planning is getting more complex day by day because of increasing options. On another hand, the costs are skyrocketing. Let’s see today how can we make a proper child education plan for our kids.
The joy of being a parent comes with a price tag. If you want the best education for your child, someone has to pay for it. Still, chances in India are that “someone” will be YOU.
A recent survey by ASSOCHAM highlights that the cost of education has gone up by over 150% in the last ten years. This is becoming a major cause of worry for parents. Majority parents spend more than Rs. 20 lakh on average in putting their child through high school.
Considering the many factors that come into play in child education planning, such as the tuition fees, accommodation costs, books, and other expenses, it is impossible to predict what the cost of education will be by the time your child is ready for it.
But, the general rule of thumb is that the tuition rates increase more than proportionately with inflation.
See for example:
Education inflation has gone up by more than 500%!
Doing the math to come up with the ‘figure’ that will secure your child’s future will probably have your eyes popping out.
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And it’s going to be even harder if your child sets his or her eyes on a university abroad.
Child Education Planning Calculator
Here is a calculator to fund out the cost after adjusting inflation. You can use this calculator for Staggered Amount Calculation (Child needs regular payments for 3-6 years during the course). Also, you may calculate it for 2 children at a time.
Are you Serious or Procrastinating?
Common reason for delay in Child Education Planning:
- Let this years bonus come. Definitely it will go for child education kitty.
- I will buy the one best plan. Let me research it.
- We will sell the house in future and invest that for my kid’s education.
None of this will work… Do not procrastinate and underestimate this need.
You just need the willpower to start as one Sunday Cost can help you start it. See the illustration below.
Thankfully, as the costs increases, so will the amount you earn. And thanks to financial literacy, we are increasingly open to investing in equities, mutual funds, bonds, etc., moving away from traditional fixed deposits.
However, with the higher risk component in market-linked investments, the challenge is subject knowledge and expertise.
No doubt Mutual funds give us access to the knowledge of professionals who have the expertise in selecting the right investments across sectors. While this is no guarantee against market volatility, it allows us to expect a reasonable return on our money if we choose our funds well and stay invested consistently.
Choosing right funds for Child Education Planning
So how do we choose the right funds for an education nest egg? Your options depend on the age of your child/children, the risk you can afford to take, the return you expect and the liquidity you need during the time of investment.
People who can see beyond 10 years always have an edge over people who don’t. Simply time will work for you. To gain from the full power of compounding, you need time and patience.
If your child has just started school, it is wise to start with SIPs in mutual funds based on your income (ranging from Rs. 1000 – 10000 per month) hiking the contribution rate by 10 – 20% every year.
Considering you have enough time to take risks, your portfolio can have more equity funds and less of debt funds. It is your time to be in the aggressive or the moderately aggressive portfolio.
However, it is wise to review your funds every year and move out of non-performing funds if they have not done well for three years.
Somewhat late now
At this stage, you an investment horizon of 5-7 years, which means you cannot be as aggressive as parents with younger children. However, this is a good horizon to explore large and multi-cap funds with a small allocation into mid cap and small cap funds.
If you prefer to work with lower risks, Balance Funds & Monthly Income Plans (MIPs) are a conservative option, but with much lower returns. Since these funds invest only a portion of equities they are less volatile than equity or balanced funds. It is worth noting that the dividends from equity and balanced funds are completely exempt from tax. And so are long-term capital gains if the holding period is more than 12 months.
However, the gains from MIPs are taxed at 20% after indexation benefit, if it is held for more than 36 months. On the other hand, a holding period of fewer than 36 months in MIPs will mean that the gains will be taxed as per the income slab. Refer Mutual Fund Taxation for details.
Almost on the edge
At this stage, you cannot afford to take risks with the money accumulated. You are now in the conservative risk bracket. A sudden downturn in the equity markets can reduce your wealth by 5-6% any day and upset your plans.
Therefore your allocation to equity funds should not be more than 20%. Gradually in the final 2 years before the achievement of your goals, route your investments into a short-term fund for 1.5 years and finally move the entire surplus into ultra short-term funds. Use the dividend option if you are in the 30% tax bracket.
If you have started at right age incorrect assets, you will never require Plan B. Just insure yourself or the breadwinner adequately. But if it was late and not calculated, you may need funds from other sources. So always have a plan B, so that an unexpected event should not shatter your child’s dreams. This plan B can be your savings, contingency fund or some funding from your retirement etc..
Finally – do not dig holes
What should you completely avoid?
- Investing in insurance plans which provide insurance to you or child and pay during college years of the child. The returns will be very less and will not beat the Education Inflation. This means either you increase the monthly/yearly amount or underfund the education goal. Mixing insurance and investments is a very bad idea.
- Investing in real estate or piece of land is also not correct. This is because when you invest in real estate there is no calculation behind it. The amount required, the rate of growth or tenure of investment. Also during correction phase, the property becomes highly illiquid.
Child Education Planning is a long process and with the correct knowledge, the stress can be taken out altogether. Do not hesitate to consult a Financial Planner for calculating your requirements.
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