Tips to ensure a bright and promising future for your child
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Tips to ensure a bright and promising future for your child

Once you know the future cost of education and where to invest, the next question is how much you need to shell out every month.

 Jinsy Mathew   
  • New Delhi,  January 29, 2016  
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Sample this. According to an Assocham report, the cost of school education has risen by a whopping 150 per cent in the last 10 years. And when it comes to professional education, in the last five years, the average increase in fees of the top three IIMs has been around 242 per cent. Evidently, raising a child in the 21st Century is not an easy job.

Bringing up a child is as much about finances as it is about emotions. Even though retail inflation is on a downward trajectory, education inflation is steadily spiking at the rate of over 10 per cent every year. In case of some premier institutions, such as IIMs and IITs, the spike has been much steeper in some years.

As a result,meeting expenses related to child's education is proving to be a major financial worry for parents.

The same was reflected in a recent survey conducted by Nielsen, where 1,000 parents across 10 cities with children belonging to the 4-12 age group participated. According to the findings, for 83 per cent of the parents surveyed, meeting children's education and related expenses came across as the number one financial priority, followed by retirement planning and EMI payment.

 

However, if one were to plan in advance and take necessary steps early in a child's life, then meeting his/her higher education expenses won't be a daunting task. At the end, it's all about being prepared for whatever choice children make as their profession. By following a few easy steps you can ease your worries with respect to your children's educational expenses.

STEP 1: DETERMINE YOUR GOAL. BE SPECIFIC.

Every parent dreams of their child becoming a doctor or an engineer or an architect. It's always ambiguous. But, to prepare for his/her future, you have to have a concrete plan. For instance, tell yourself "I have to save for my daughter's engineering degree". For the time being, decide on behalf of your child. Once decided, it is time to consider the time horizon or the target date. The one good thing about education planning is that you know for sure when the cash is required. Thus far, you have reached a decision which is - "I am saving for my daughter's engineering degree in 2030".

STEP 2: DETERMINE THE FUTURE COST OF EDUCATION

There are several educational websites which help calculate or tabulate the cost of different degrees, as of today. With the help of these, note down the current cost of the desired degree. At this stage, it's imperative to determine if the child will be studying in India or overseas.

Accordingly, while calculating, one has to take into account the currency aspect as well. Once the current cost is known, it will be easier to determine the tentative future cost of the same degree on the target date. This will help one fix a realistic target amount.Inflation is another parameter to be considered at this step. This is because, with the education inflation rising at the rate of 10 per cent plus, there is a danger of inflation creating a dent in your savings.

A formula to consider the future rate of the current educational fee is to use the compound interest formula. For example: If the current course fee for an engineering degree is Rs 8 lakh, with a 10 per cent inflation, the future cost after 20 years can be computed as Target Amount = Amount today * (1 + inflation rate) ^ Tenure= 8,00,000*(1+0.10)^20 = 54, 00, 000 (approximately) .Now that the target amount to be achieved is set, it's easier to choose the kind of financial instruments that can help you achieve the goal of generating a corpus of Rs 54 lakh.

STEP 3: CHOOSE AN INVESTMENT OPTION

This is a very crucial step in the planning stage. There is no fixed way to achieve the goal. Depending on one's financial product knowledge and risk appetite, one can opt for equity, debt or for a mix of products such as balanced fund which has a mixture of equity and debt components.

According to Raghvendra Nath of Ladderup Wealth Management, "Children's education is a very long-term goal as we have at least 15 years in hand to invest. And when it comes to long-term plans, equity is the best asset class to rely on."

However, Nath cautions that for a middle-class parent it is imperative to possess a good term insurance plan before buying a mutual fund, such that in case of any negative eventuality, the child's education potential is not hampered due to lack of finances.

There are also child specific unit linked plans. These plans come with an in-built feature of waiver of premium. The option offers triple benefits. First, the policy pays a lump sum amount on the death of a policyholder. Second, the policy continues even after the death of a policyholder.

Third, on maturity, the child gets a lump sum amount for his or her education or marriage, the way you had planned for them. The only flip side is that some of these plans come with high charges; so before buying one, do look at the cost structure.

Chandresh Kumar Nigam, Managing Director and Chief Executive Officer at Axis Asset Management, notes that it is important to have a multi-asset investment approach to tackle the high inflation numbers. For this, he advocates a balanced mutual fund. "Historical data shows that balanced fund generates return close to equity funds, with the risk being lower or closer to fixed income because money here is diversified across equity and debt," he explains.

Both the experts concur that in case the target corpus is generated well ahead of time, it would be advisable to withdraw a part of the investment and park the fund into a fixed income product such that any negative surprise in the equity market in the last year of investment won't hamper the prospects of your savings. Lastly, Nath suggests that once a SIP has been started, parents should regularly step up the investment amount in accordance with their hike in salary.

STEP 4: HOW MUCH TO INVEST?

Once you know the future cost of education and identify where to invest, the next question is how much you need to shell out every month. For example, you can accumulate Rs 38 lakh over a period of 15 years by investing Rs 10,000 every month in an equity mutual fund, at an assumed return of 9 per cent. The higher the cost of education, the more you need to save.