Planning for a child’s education is an important part of every parent’s financial planning. While everyone wants to save for a child’s education, how you invest your savings can make the difference between good and bad financial planning. Investing all your savings in fixed deposits or other debt instruments will only help you keep pace with inflation and not build up a significant corpus. Worse yet, if education inflation outpaces core inflation over the years, you will actually be ‘destroying’ the fund. On the other hand, parents who were saving for their child’s education in an equity-heavy fund just before the start of the Great Recession might have wondered where to go wrong with the whole ‘equity is other asset classes’ message. Gone. Another thing that I have seen people ignore is inflation in education fees, assuming the fees will be the same forever, and not adjust to inflation.
If there’s one tip everyone needs to keep in mind, it’s to start early. The power of compounding works wonders.
Let me illustrate with an example of planning for my child’s graduate studies. I have used Cost Estimates from Harvard’s website for the purpose of this exercise. I will need to build a fund for 4 years of undergraduate study. She is currently 3 years old, and I hope to enroll in the UG program at the age of 18. Assuming inflation at 6% (US inflation at 2% and currency depreciation at ~4.5%), I would need 1.5 crore-1.6 crore annually for years 18 to 21.
Advice
start early: If I had started planning from today, I would have needed to save around 12 lakhs annually in a balanced fund to be able to meet my desired goal. Had I started when my daughter was born, the annual requirement would have been 7.7 lakhs.
Use the Step-Up Investment Plan to: The number to point 1 may seem daunting to a typical Indian parent, especially to a young parent who may have recently entered the workforce. But we expect a salary increase every year, and expect that we should be able to save a sizable amount every year. If we can budget for 10% increased savings every year, falling in number 1 becomes more than 4.8 lakhs manageable if one starts saving from day one.
Have a balanced portfolio mix that meets your goals, and rebalance yourself Portfolio when needed: Equities outperform many other asset classes but over the long term. Keeping this in mind, the right portfolio mix to invest your savings every year could be 90:10 Equity: Debt in the initial years. As you need funds, you should rebalance the portfolio by selling the equity corpus and redeploying it in a less risky debt portfolio. In the above example, the idea would be that part of the equity portfolio gets transferred to debt funds starting from 15 years. This will protect the corpus from volatility in equity returns near drawdown. Instead of looking at returns every day, one should review the portfolio every year for any rebalancing.
Hot Tips, or Don’t Chase Foreign Products – Stick to Index Funds: Following the latest telegram/whatsapp/analyst tip is probably the worst thing to do while planning for the future. Thinking that someone can consistently outperform the market if this is not their main job is equally bad. It’s better to be boring, than trying to find the next big thing. Find low cost index funds and invest in the same. If you do not want to invest in debt funds, then FD is fine for debt exposure. The reason I recommend FDs is because people generally take risks like equities in debt funds while chasing yields. Speculative investing is better not to be a part of your fund portfolio or at best a % (low single digit), which will not change significantly even if your total corpus is wiped out.
Other sources of funding are: All possible options should be explored to reduce the cost of education through grants, scholarships or discounts. If your corpus is not enough, then education loan is definitely an option one should consider. I would recommend education loans even if one has money due to tax benefits, and also as a way to instill financial discipline in one’s child.
I use only 2 funds to plan my daughter’s higher education fund
Axis Long Term Equity Fund – ELSS fund which allows me to avail Sec80C benefits while investing for child’s education. I deploy 1.5 lakh annually in this fund.
UTI Nifty 50 Index Fund – Primary investment choice for me. You can choose any index fund.
(Author: Mr. Ankit Mehra CEO & Co-Founder of GyanDhan)
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