It is the dream of every parent to ensure that their children's future is secure, especially by giving them the best education possible. However, planning for your children's education calls for more than just investing in the child plans advertised, with large doses of syrupy sentiment, by insurance companies or mutual funds.
Saving for a child's education requires careful planning, discipline and regular monitoring if you are to reach your target.
Take the following cases of investors who actually wrote in to us. Vaidehi, working in a software company, never planned for her children's education because of her confidence in her company's ESOP plan (Employee Stock Ownership Plan). She was sure that selling the options whenever the need arose would take care of all the education expenses.
However, when she actually wanted to put her son into a leading engineering college in Chennai, she discovered, to her shock, that her ESOPs did not cover even the first year's fee. She had to resort to taking a personal loan to pay the capitation fee and an education loan on top of that to pay the college fees.
Or take the case of Badri who, despite working in a MNC, had to run from pillar to post to arrange a loan when his son wanted to pursue higher education in the US. Since he doesn't believe in buying a house and had invested in land instead, he could not offer any collateral for the education loan.
These two instances underline the importance of the kind of proper planning and diversification required to build up your children's education corpus. So how can you go about building up such a fund? Here are some steps that can be followed:
Make your own plan
Most of us think that planning for our children's education stops with buying a standard plan sold by an insurance company or a mutual fund.
But such an approach could leave us with an inadequate corpus when we need it, for two reasons. One, we may not have accurately assessed the target corpus really needed for the child's education. The eventual corpus will obviously depend on how much one managed to invest in the plan.
Two, we may have failed to monitor the fund. If a neighbour told you to invest in a financial product and you wait till its maturity without monitoring and evaluating its performance at frequent intervals, there is every chance that the fund or plan you chose will fail to make the returns that you expected. This may ruin your chances of meeting your goal despite your saving diligently for the purpose. In investments, remember, one size will not fit all, because your risk appetite, time horizon, inflation and ability to save will matter the most in building a corpus.
Build the right portfolio
Construct your portfolio based on your risk appetite and time horizon. In a recent survey conducted by ING Life insurance, 50 per cent of Indian respondents said that their second biggest priority in investing is children's education. About 43 per cent those saving for their children start when the child's age is less than three.
But what was surprising was that, despite the long investment horizon, the majority of the investors put their money into fixed deposits, insurance and real estate, in that order.
Equity is the best asset class to beat inflation and also the ideal bet for the long term. That this asset fails to make it into the top four investment options clearly emphasises that investors are not constructing an appropriate portfolio for their children's education. Few of us can tell when the child is in primary school what course he or she may want to pursue. But, going by the common choices of today, pursuing an engineering education in a reputed college now costs Rs 8-10 lakh for a four-year period.
Putting your ward through medical studies, even through the management quota, will require you to shell out at least Rs 20 lakh(without capitation fees). If you want to send your child abroad to do a master's degree in engineering, it will work out to Rs 15-30 lakh, depending on the institution.
That needs to be adjusted for inflation too. At an inflation rate of 7 per cent a year, higher education expenses (of Rs 10 lakh at present) will go up to Rs 31.5 lakh in 17 years.
The medical degree will cost Rs 55 lakh in 15 years and for an overseas master's degree of Rs 30 lakh, you will have to spend Rs 82 lakh. Do remember, with so much demand for it, the cost of a good education may rise at a rate higher than the official inflation numbers. Assume you wish to build a corpus of Rs 30 lakh in 15 years, the anticipated return will decide your monthly savings. For instance, to achieve a return of 12 per cent, you need to save monthly a sum of Rs 6,005, if the target is 10 per cent it will be Rs 7,238 and, finally, if you are conservative and wish to achieve a return of 8 per cent, you ought to save Rs 8,670 a month.
Where to invest
It's all about deciding how much of your savings you need to put in individual asset classes such as equity, debt, gold and real estate. That should be based on your risk appetite and time horizon. For instance, an asset class such as equity may subject you to short-term losses but will be better to beat inflation with, in the long term.
Debt is more stable and will yield lower returns, which, at times, may even fail to beat inflation. How much equity you have in your portfolio should depend on your time horizon. If your child's education goal is just five years away, you need to put less in equity and more in debt. If it is 10 years or more away, go for a higher equity exposure.
If you start early, you can construct a portfolio with a higher exposure to equity of, say, 60 per cent, 20 per cent in debt and 10 per cent each in gold and real estate. You will find it difficult to invest in real estate on a monthly basis and need to park your surplus accordingly.
If you construct a portfolio as suggested by us, you should target an approximate return of 15 per cent, 7 per cent, 10 per cent and 8 per cent from the four assets suggested. That should average out to a 12.2 per cent annual return. There is no guarantee that the assets you choose will deliver the expected returns like clockwork. That is the reason why you need to evaluate the portfolio at regular intervals and take corrective steps accordingly.
And how do you break up the above allocations further? See Box story for the details.
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