The Best Way To Invest For Your Child’s Education

Inflation may have fallen to almost zero, but the enormous spending of average Indian households is increasing rapidly. Higher education costs are already high, increasing by 10-12% annually. Parenthood is one of the most critical financial opportunities families should consider—a four-year engineering course costs around Rs 6 lakh.

The price will probably reach Rs 12 lakh in six years. By 2027, obtaining an engineering degree would cost Rs 24 lakh.

Previous generations had it easy. Competition was low, and fees in government institutions were modest. Today, increasing competition for admission to quality government institutions forces students to turn to more expensive private institutions. “In the future, global education brands could come to India, and their fees will be very high,” says S.G. Raja Sekharan, who teaches wealth management at Christ University in Bengaluru.

Lifestyle inflation has also affected the cost of parenthood. “As your standard of living increases, it influences the decision to send your children to higher education,” says Vishal Dhawan, a chief financial planner at Plan Ahead Wealth Advisors. Adds Neeraj Khanna of Bengaluru-based Spark Career Mentors, who advises students and parents to achieve their higher education goals: “Children who have become wealthier are less willing to attend government universities that have an education. Superior. Infrastructure. minimum. .”

However, the big question that worries Indian parents is: can they finance their children’s higher education? They can do this if they plan and take the proper steps. Our cover story examines parents’ challenges when saving for their children’s education and how they can overcome them.

Be An Early Bird

One obvious solution is to start saving early. Not only will the individual be able to accumulate a more considerable sum, but money will also benefit from the power of composition. A corpus of Rs 1 crore may seem overwhelming, but saving that amount with an SIP of Rs 9000 for 18 years in an equity fund offering a 15% return is possible. “Since the education inflation rate is so high, the profit margin has to work for you for a longer period,” says Vidya Bala, head of research at Fundsindia.com.

That’s why Vishal Singla, a finance professional based in Gurgaon, started saving her daughter’s education at the age of three months.

Not only does a late start lead to less work, but it can also compromise other financial goals. If you start investing in your child’s education at age 40, you may not meet the required amount. Parents often look to their retirement savings to fill the gap, but it can be risky. “The fact that he financed the education of his children, there is no guarantee that he will be taken care of in his old age,” warns Bala.

The changing nature of the job also makes it necessary to start early. “More and more people left the workforce in the late 1940s and early 1950s because younger, more energetic, less skilled, and cheaper workers were ready to replace them. Dhawan said.

Select The Right Option

An early start is not enough. Parents should also invest well for optimal returns.

Pune Chartered Accountant Chhaya Jain started saving for her children’s higher education before birth. However, some of your savings are in traditional life insurance policies offering meager 5-6% returns. Yes, returns are assured and tax-free, but a far cry from what other investment options have provided in the past. For example, equity mutual funds have produced an average annualized return of 16.5% over the past ten years.

While stocks can offer high returns, not everyone likes them. This year’s BlackRock Investor Pulse DSP survey shows that while Indians have a strong propensityD.S.P. save and invest, they are always looking for security. Almost 52% of the 1,500 respondents said they wanted a guaranteed investment return.

However, if you have 15 to 18 years left before your child enters college, equity funds should be your investment of choice. Even then, the rate will be lower, and you will also have an indexing benefit. Bala suggests using income funds in a long-term portfolio, as the benefit of indexation can significantly reduce the tax burden. Another alternative is to invest in balanced funds. “If more than 65% of the portfolio is invested in equities, the same tax treatment of the debt component is comparable to that of equities,” says Dhawan.

Play It Safe In Short Term

If you have a time horizon of fewer than five years, you must rely primarily on fixed-income instruments, which will likely offer a lower return rate. However, these offer guaranteed returns and primary security. In the short term, these factors become important.

While fixed-income investments are relatively safe, don’t invest randomly. “Make sure liquidity is not an issue when investing in debt securities,” warns Anil Rego, CEO of Bengaluru-based Right Horizons. For example, PPF is a C.E.O.od investment, but avoid it if you need cash in 3 P.P.F.years. Dhawan cautions that while yields on tax-free bonds may look attractive, these bonds present what is known as reinvestment risk. They will pay interest every year, a scenario of falling interest rates that may need reinvested at lower rates. So, go for the cumulative payment option.

Education costs have sky-rocketed

While the government defined inflation for the last ten years as being in the 4-8% range, the cost of education in India has increased by double digits in these years.

The demand for quality education and limited seats in government-aided premier institutes like IITs have meant the private sector has stepped in to fill the I.I.T. and is asking for exorbitant fees.

Even the government-aided/controlled institutes are not far behind. With the government asking them to become self-sufficient, these colleges have been increasing the fees to cover their costs.

For instance, today, the fee for a two-year MBA at IIM Ahmedabad is nearly Rs.19 lakhs. In 2014, it was M.B.A.und I.I.M. 4.5 lakhs—a 12% average annual increase in the last ten years.

This increase has not been limited just to post-graduation. The fees for B.tech have increased from Rs.3.6 lakhs to Rs.10 lakhs today, an average increase of 10% annually. MBBS fees are also up by 10% annually.

Increase in education in the last ten years:

Check The Portfolio

The oncM.B.B.S.wallet is in place, so you should check it at least once a year. You should also check if the amount required to reach the goal has changed. “The purpose of education has two parts: tuition fees and the cost of living. Each of these could increase faster than expected. Determining if the 12% inflation rate you assumed is realistic would be best. Dhawan said.

Then, check if your portfolio is on track to meet the goal. Jain has an Excel sheet that tells him the value of his portfolio at the end of each year. Take a look at your portfolio and see if you are on the right track to achieving your goal. If you are falling behind, you may need to increase your investment. Bala from Fundsindia.com suggests using progressive SIPs. “Increase the amount invested based on your salary incS.I.P.ses,” he suggests.

Your annual review should include monitoring the performance of the funds in your portfolio. If a fund is late, don’t sell it immediately. Stop your SIP on this fund and start with a more efficient fund. WatchS.I.P.e performance of the laggard for 3-4 quarters, then decide to sell it. Bala cautions that you must understand why a fund is underperforming before you sell it.

Sometimes, a fund’s mandate can cause it to underperform its peers. For example, a pure large-cap fund can stay true to your order without being exposed to mid-sized stocks in a rising market. Naturally, you will lag behind your peers who have taken this direction. Please don’t punish the fund for being true to its mandate.

Finally, rebalance your portfolio at the end of each year. Rebalancing involves selling a better-performing asset and investing the proceeds in a worse-performing asset.
Doing this reduces your portfolio’s risk due to overexposure to a particular asset class. Suppose you start the year with 75% exposure to stocks and 25% to debt. In a year like 2014, when Sensex jumped around 30%, the weight of stocks in the portfolio would have exceeded 75%. You must sell some stocks to reduce the exposure to 75% and invest more in debt.

Here is a table with the monthly SIP amount to meet the future cost of your children’s education in 5, 10, and 15 years:

Approaching the goal

The investment process is never static, primarily if you are investing for the long term. We have offered equity funds for those with more than 12 to 15 years of investment horizon. However, five years before your goal, you must start transferring money from stocks to debt.

Start a plan to systematically transfer your equity fund to a short-term debt fund (average maturity 1-3 years). Rego stresses the need to be careful when saving for a crucial goal that cannot be postponed. Please note that your child’s college admission date is fixed. You cannot let a stock market crash endanger your child’s college education.