Thinking of your child’s education plan? Read this first
PNB MetLife 25-12-2018 10:47:18 AM
It is said that the cost of higher education in this country has the highest inflation rates. By 2025, the average cost of MBA degree will be around Rs. 50-60 Lakhs, while the cost for an engineering degree will be around Rs. 25-30 Lakhs [source: timesgraduates.com]. Having consistently escalated in the past, we can now see sharp spikes in the fees charged by most educational institutions. Indian parents spend Rs 12.25 lakhs on children’s education. The world average spending on children from primary school to university undergraduate levels is about $44,221 (Rs 29 lakhs) [source: hindustantimes.com].
It’s important to keep certain essential points in mind to stay ahead of the game and come up with a child investment plan that matches your child’s dreams of higher education.
The early bird still gets the worm
While considering a long-term goal, starting early will be a boon. By beginning your investment journey when your child is as young as 2 or 3 years, you get a decent number of years to build up your corpus. These years help you to accumulate larger sums so that your child’s dreams can be supported without putting your lifestyle at risk. By starting early, you are also being kinder to your pocket as you can invest sums as small as Rs. 5000 and reap a large benefit over the years. Delaying your child education plan means you will need to invest much more later, to meet your targeted amount. It also reduces your ability to take risks.
Reviewing and revising your investment strategy
If for some reason you wait till your child is older, then the strategy for your child investment plan will need to be modified. With a short time, (5 to 8 years), you’ll have to minimise the risks accordingly. Hence it would make sense to invest in balanced funds that combine stocks and bonds rather than go heavily into equity funds.
MIPs (Monthly Income Plans) are also a great way to play safe as they place only 15-20% in equities. It’s good to be aware that while the gains from equity and balanced funds are tax free after a year; the returns from MIPs are taxed at 20% after the indexation benefit.
Recurring Deposits and SIPs are also tax efficient and create disciplined investing habits. Such investments can be well timed and planned so that your child education plan can benefit from them when it’s time to use the funds.
When you are almost at the goal
If your child is almost ready for higher education and the goal is just 2-4 years away; the child plan will once again need to be revised. The obvious investment strategy will be to focus on capital protection. Your hard-earned money that has been invested so wisely will need to be safeguarded. Some parents allocate 75% of the corpus to a secure bank deposit. In general, during this phase of the plan, equity investments should be around 10-15%. It is time to prepare for the approaching event.
Safeguard the future
Despite your best investments and intentions, if you were to fall short, avoid dipping into your retirement savings. As an alternative, take an education loan with your child as a co-borrower. Your child will value the education even more and will also learn a discipline of saving. At the same time, your retirement savings will remain safe.
As a final word, do remember that you are the fundamental key in this plan. In case of an unforeseen event, your entire child education plan could become meaningless. You can prevent this by buying a good life insurance plan and investing in a good term plan. It’s the surest way to safeguard your most cherished dreams.