The education of their children remains an aspirational goal for every Indian parent. Every parent wants and strives to provide the best quality education and seeks to fulfill the dreams of their children.
However, the burgeoning cost of education – both in India and abroad has been a cause of concern for parents looking for higher education for their children.
While the cost of education in India has grown significantly over the past decade, the cost abroad is no better – owing to inflation in the local currency and rupee depreciation over the years.
Now, since education is getting expensive, it is critical to have a defined savings plan from an early age – something that is affordable for parents to keep aside and gives a runaway to accumulate.
For example, if parents start to save for their child’s education immediately after the birth of the child, they would get a runway of 18 years for a bachelor’s and 21-22 years for a master’s.
Starting early would help the power of compounding to work in your favor and help you get closer to the goal with a smaller sum too.
The amount kept aside for this defined and critical goal balloons with every year’s delay (see chart below).
|
2020 |
2030 | |
|
Cost of Tuition Fees (Rs Lakhs) |
25 |
49 |
|
Cost of Living (Rs Lakhs) |
10 |
20 |
|
Total (Rs Lakhs) |
35 |
69 |
Source: EduFund Research
Cost of delaying – SIP amount increases with every year skipped
Source: EduFund Research
Let us now see an example of two parents – Abhishek and Sneha.
The situation at hand –
 | Objective – To send a child abroad for engineering education · Abhishek – Looking for Education Loan @ 8% · Sneha – Looking to invest systematically and accumulate corpus in 10 years, expecting returns of 12% |  |
Abhishek and Sneha want to send their child abroad for engineering education when she turns 18. While Sneha believes in accumulating the amount by investing in a mutual fund every month, Abhishek feels opting for an education loan makes more sense.
Both Abhishek and Sneha have a 10-year horizon where Sneha would save for the period aiming to make 12% returns annually, and Abhishek is looking to repay the loan borrowed at 8%. Let us evaluate which is a better plan –
The Results
Corpus required –
|
2020 |
2030 | |
|
Cost of Tuition Fees (Rs Lakhs) |
25 |
49 |
|
Cost of Living (Rs Lakhs) |
10 |
20 |
|
Total (Rs Lakhs) |
35 |
69 |
Sneha’s investment plan:
Systematic Investment Plan (SIP) – Rs 30799 per month for 10 years
Abhishek’s loan plan:
Equated Monthly Instalment (EMI) – Rs 83716 per month for a time duration of 10 years
What we see is to reach her goal of global Education, Sneha set aside Rs 37K through SIP to accumulate the corpus.
Abhishek, meanwhile, gets instant access to the corpus but ends up paying Rs 83716 in monthly installments. Also, by the end of 10 years, he pays Rs 31 as interest making education costs rise 45%.
Both Abhishek and Sneha would have to make monthly payments, but Abhishek would pay substantially more every month. Abhishek would also spend much more on the same Education than Sneha.
When to use an Education Loan?
Despite starting to save early for a future defined and aspirational goal, a parent may still face a shortfall in the corpus. The reasons for the shortfall can be varied. For example, one instance could be because of the change in the nature of the goal.
For instance, you might have budgeted for sending your child to Singapore but may end up sending them to the US where the cost is comparatively higher.
However, this possible shortfall is not an excuse but is a function of change in the plan. In such circumstances, it makes sense to fulfill the gap with an education loan.
Also, it gets to avail of a loan for part cost and not the full cost.
Is it possible to reduce your SIP initially and pull it up?
Of course, yes, you can always go for milestone planning where you can define a start-point, specific deadline, and final goal.
This method ensures you map your SIP to your pocket size, and as time passes by, you tend to increase the outlay towards the goal.
Thereby following an exponential roadmap rather than a simple straight line which may not be affordable in the initial years due to multiple other expenses.
To sum up, we can say the following –
- Based on the child’s currency age, a parent can start planning for higher education. This helps in being pocket friendly and remains disciplined for a defined liability that is due to come in a few years.
- Dividing the goal into smaller milestones and targeting each milestone helps the parent have a roadmap to the goal. This ensures a pocket, friendly method of investing.
- Education loan is available on short notice; however, it should be used to fill the gap instead of dependence on the full corpus.
This strategy will allow you to fund your child’s education with minimal stress.
FAQs
How much should we save for a child’s education?
Education inflation has been rising at a steady rate in the past few years. Parents should be aware of the significance of saving early to be in a position to afford their child’s future education costs.
The cost of education varies depending on the choice of course, so it’s better for parents to start saving early, so they can adjust their portfolio once they have a goal in sight.
What is the best way to save money for a child in India?
It goes on without saying that mutual funds have been gaining traction over the past few decades, and the burgeoning size of the assets under management has made people think of the investment vehicle.
Also, with declining or unfavorable returns on instruments such as fixed deposits, provident funds, and the like, the most lucrative option remains – mutual funds.
However, not all mutual funds would be able to help you achieve your target. Thus, you need to plan as per your risk appetite so that you do not derail from the track of your defined event.
Why should parents invest early in their child’s education?
While the cost of education in India has grown significantly over the past decade, the cost abroad is no better – owing to inflation in the local currency and rupee depreciation over the years.
Since education is getting expensive, it is critical to have a defined savings plan from an early age – something that is affordable for parents to keep aside and gives a runaway to accumulate.
For example, if parents start to save for their child’s education immediately after the birth of the child, they would get a runway of 18 years for a bachelor’s and 21-22 years for a master’s. Starting early would help the power of compounding to work in your favor and help you get closer to the goal with a smaller sum too.
What is the best investment for a child’s education?
By investing through SIPs, you will do away with the burden of timing the market as you could then avail the benefit of Rupee Cost Averaging. By investing through SIP, you tend to invest in the up-and-down markets.
This helps you shy away from the volatility of the market. Additionally, you will benefit from the power of compounding, which fundamentally generates returns not only on capital but also on returns.
