TomorrowMakers ™

How to plan for child education expenses

17 February 2017
Rather than making investments on ad-hoc basis, it’s crucial that one puts a plan in place to meet child’s education needs.
 
 

By Sunil Dhawan


The cost of education in India is increasing at a fast pace. From primary to secondary to higher education, parents are increasingly finding it difficult to meet the growing fee structure and other costs associated with education. Aniruddha Bose, Director & Business Head, FinEdge Advisory says, “Education costs are inflating at an above-normal rate, and the returns on your child education fund need to outpace inflation.”

According to National Sample Survey Office (NSSO), between 2008 and 2014, the average annual private expenditure for general education (primary level to post graduation and above) shot up by a staggering 175 percent while during the same period, the annual cost of professional and technical education increased by 96 percent. The expenses typically include course fees, books, transportation, coaching and other related costs.

The cost of providing education in private institutions in 2014 was about 11 times that in government schools, while the cost of higher education from a private institution is about three times that in one run by the government.

According to rough estimates, on an annual basis the education inflation is about 10-12 percent. Even by conservative estimate, if education cost inflation of 6 per cent a year is considered, then an engineering course that costs Rs 6 lakh at present will cost around Rs 15 lakh after 16 years. Similarly, an MBA course that costs around Rs 10 lakh would cost around Rs 34 lakh after 21 years.

Related: How much does it cost to educate your child in India [infographic]
Thankfully, for parents whose children are about to join a college or want to pursue higher education, but are short of funds, education loans come to their rescue. However, you should depend on education loans only to bridge the gap between your savings and the actual requirement. So, if your children are still small and have a few years before funds will be needed for them, here’s how you can self fund your child’s education.

Put a plan in place: One needs to put a plan in place by setting up a target amount for child’s education needs. The world is witnessing newer types of courses and it might be difficult for you to zero-in at the career option which your child might take up in the future. Still, to make an informed start, identify 2-3 career options and find out their current cost. Inflate it by considering a conservative inflation of 8 percent per annum for the number of years after which the child would require funds.


Once you have estimated the requirement, find out how much you would require investing each month towards it. Assuming a growth rate of 12 per cent in the above example, you need to put aside around Rs 2,600 per month for the engineering course you child will pursue after 16 years, while it will be about Rs 3,100 per month for doing MBA after 21 years. You may take the help of financial planners or online calculators to arrive at the figure.

Essentials: For better management of funds, create separate portfolio for child needs. For more than one child, also earmark funds separately. Bose suggests, “Create separate buckets of investments for education costs that will arise in the short term, medium term and long term, respectively. Assign separate regular savings to each bucket and track them closely.”

For long-term goals, equities are the best bet. It has been seen in the past that over the long term, equity has delivered higher inflation-adjusted return than any other asset class such as debt, gold or real estate.

Portfolio: The investment portfolio for child needs, when they are at least ten years away, should primarily hinge on equities. Therefore, equity-oriented instruments such as equity mutual funds, Ulips with equity fund options can be the mainstay of one’s portfolio. In addition, a public provident fund (PPF) account may also be used to fund your child education needs. “Basically, the key determinant of the ideal asset allocation would be the number of years left for the goal achievement,” says Bose.

Mutual funds for child needs
Stick with diversified equity mutual fund schemes. Start SIP in 2-4 equity-oriented mutual fund schemes with a mix of large-cap and mid-cap funds too. Keep adding additional funds received by children on birthdays or gifts from grandparents to the same mutual fund folio. One may even invest through equity-linked saving schemes that will not only save for child needs but also save tax. As and when the child needs funds for education purpose, redeem units but keep the investment on. “Short-term needs are better off financed from current income. For accumulating funds for an education goal that is 3-5 years away, one can opt for SIP’s in balanced funds and for longer-term goals, SIP’s in mid cap and large cap equity funds are suitable”, advices Bose.

Child Ulips 
One may even consider investing through child Ulips with the waiver of premium feature to ensure that the child gets the required amount at the desired age. Be invested in the equity fund option of child Ulip to reap optimum benefits over the long term. As a parent, ensure you have adequate life insurance preferably through pure term insurance plan so that any unfortunate incident does not derail children needs.

Related: 8 financial steps to take before you have a child

PPF for child needs
One may also consider investing for child needs by opening a public provident fund (PPF) account in the child’s name. PPF is a 15-year scheme and would help create a tax-free corpus for the child. As and when the child needs funds, withdraw partially anytime after sixth year i.e. start of the seventh year. Once the child becomes adult, the contributions may be made by the child too and the same account may be extended indefinitely. However, remember that PPF is a debt investment and hence inflation-adjusted return would be low in it, thereby impacting wealth creation. Also, the combined limit for parent and child PPF accounts is Rs 1.5 lakh per annum.

Conclusion: De-risk the funds earmarked for children education at least three years away from the goal by shifting from equity to less-volatile debt assets. And remember not to touch the child investment portfolio for any need other than what it has been created for. “Even if you were to pause your monthly saving for a while, do not redeem your goal-based investment to finance other short-term needs” is what Bose suggests. Funding your child’s education is, in fact, one dream you cherished the day your kid was born. Do not, therefore, do anything which stops you from realising your dream.

(Readers are advised to consult their tax advisor for detailed advice.)

Source: Economic Times

 
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