Investment strategy to save money for child’s higher education
Inflation may have reduced to 4 – 2% levels from its historical high, but the expense of services such as education and healthcare has been rising.
Thus, you must save enough to avoid facing any cash crunch when it comes to fulfilling the educational need of your children. In this blog, we discuss how you can use mutual funds to fulfill the needs of your child’s education.
A child’s education is one of a family’s most significant and crucial cash outflows. If you look at the tuition cost, a four-year engineering course costs around Rs 5 – 6 lakhs today.
Assume your child is 7 – 8 years old and is likely to start his engineering in 10 years. The current cost may rise to Rs 10 – 12 lakhs, considering the 8 – 10% inflation.
Will the fees increase this much? The earlier generation had it very easy when the competition and costs were less.
But today’s competition has been on a rising spree, and everyone is considering sending their child to the best engineering college where the fees are increasing owing to rising demand.
Also, lifestyle inflation has impacted the cost of education in India. As your standard of living improves, it directly influences your decision about where you want your children to study.
While we are considering only engineering courses here, a management course is lined up after engineering.
The two-year management course from an elite B-school is currently in the range of Rs 20 lakhs, which may increase to 2x by the time your child enrolls in the course.
How can you overcome the problem of rising education costs?
The big question that is worrying parents is, how will you be able to fund your child’s education?
- Start early – One of the distinct ways to accumulate money for your child’s education is to start soon. Individuals may need more time to amass a large sum of money, and thus they should benefit from the power of compounding. A corpus of 1 crore may seem very high, but it could be planned better. For example, a SIP of Rs 3000 for 20 years should help you accumulate a corpus of Rs 45 Lakhs.
It would help if you did not wait for the child to turn 10; instead, should start saving from the time the child is born. This gives you a much longer term to save and accumulate the money.
For example, if you started the same SIP for ten years instead of 20 years, you would need to save Rs 16500 per month to achieve the same corpus as above.
Remember, a delayed start yields a small corpus and impacts your other financial objective. If you start investing for your child at 40-45, you will likely need more than the required amount.
In such cases, parents often use their retirement corpus in India for their children’s education, which is not a good move but only amplifies the risk.
- Choose the correct option – Starting early isn’t enough. You need to ensure that the money you save when you start early makes you money. Thus, you must ensure that the funds you select are suitable or the asset allocation is proper.
How to do asset allocation?
Very simple, merge your asset risk profile with the fund’s risk profile. If you start saving early in life, when the child is born, you have a long-term horizon to save. For this, you may opt for equities and equity-based funds.
- Play safe over the short-term – If the horizon is short, say less than five years. Ideally, it would be best if you opted for a balanced portfolio with a higher debt and debt-based funds allocation. While investing in debt funds is safe, you should not invest in random and conduct the right diligence before selecting.
- Review portfolio timely – Once you have allocated a corpus to a different asset class and started investing, you must review your portfolio from time to time. Depending on the performance of the various instruments in your portfolio, you may need to re-balance your portfolio from time to time. Re-balancing ensures that your portfolio is a true reflection of your conviction. As an investor, you stay focused due to the performance of a few asset classes while ignoring the risk element. Also, reviewing the portfolio regularly gives you comfort in your financial goals. It helps you get comfortable if you are on track to meet your objective. If not, consider changing the asset allocation or the instruments within the asset class.
What do you do as you approach your goal?
Investing is never a static process; if it is capital, it is bound to be volatile. While you may start with a 100% equity portfolio at the time of your childbirth (when you have 20 odd years in hand) but when you are approaching closer to the goal to safeguard the accumulated corpus by way of capital gain, you need to start moving your corpus to a comparatively safer asset class.
For example, when you are just five years away from the goal, you must start a Systematic Transfer Plan (STP) and take out the money systematically from your equity funds to a safer debt fund.
This way, you will be able to safeguard your capital by the time you reach your time (say, time to pay college fees).
Remember, you must act cautiously when your goals are crucial and must be completed on time. This is because market volatility can’t be predicted, and you may lose a considerable chunk if not planned well.
For example, assume you needed money in December 2016 for your child’s education and have invested 100% in equities since 2006.
You would have garnered a sizeable sum in 10 years, but you should have safeguarded your capital in 2016, thinking you would gain more.
But in November 2016, demonetization happened, and the market corrected considerably. At this time, it would be better to start early and in a disciplined manner.
If you had begun shifting money from equity to debt in January 2016, you would have been left with money that would have helped you meet your expenses.
To conclude, mutual funds are a great tool to invest and plan for your financial goals. Given that goals are different in nature and importance, you must plan for each purpose separately instead of having one plan for all. Remember, in mutual funds, one size may not fit all.
Thus, your plans are personalized and customized to your profile and not replicated by your colleagues. To know more about profiling yourself or constructing your portfolio with the right asset mix, feel free to reach us at firstname.lastname@example.org.
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