Three essential ingredients to a child’s education plan

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Building up a tidy sum towards children’s education is the top financial aspiration for most Indian parents and often takes precedence over every other goal.

Aware that an early start makes all the difference, many parents today are prepared to invest towards this right from the toddler stage.

But an early start will be of little use if you end up investing in the wrong class of products, based on emotional sales pitches that help line the pockets of product sellers more than investors. Here are some of the essential ingredients to building a healthy corpus for your child’s education.

Budget for high inflation

In India, the demand for quality education far outpaces the supply of seats offered by top-tier institutions. This mismatch, and the government’s efforts to make public education institutions more self-sustaining, has resulted in the cost of higher education galloping at a higher pace than the general inflation rate. Official data tells us that the CPI index for education increased at about 6% annually in the last eight years, but fees at the sought-after colleges have risen much faster.

In the IITs, for example, the total cost of a four-year B-Tech course adds up to ₹8-10 lakh today, a fourfold increase from about ₹2 lakh in 2012. The course fee at the top three IIMs is about ₹21-22 lakh against ₹13-15 lakh in 2012.

The cost of putting your child through private colleges is significantly higher. BITS Pilani levies ₹20-24 lakh for a four-year B Tech degree. The cost of a BA (Hons), BSc (Hons) at the Ashoka University is close to ₹28 lakh.

So, while the current cost of a graduate plus post-graduate degree at premier institutions is about ₹30-40 lakh, you need to budget for inflation in these costs over the next 10-20 years to decide on your target corpus.

Many online calculators help you figure out this target corpus. While using them, be sure to use inflation assumptions of 8-10%, rather than the default numbers of 5-6% to get to a realistic figure. For instance, at 8% inflation, ₹30 lakh in today’s prices will be about ₹95 lakh in 15 years’ time.

Don’t shun equities

Many folks investing for their child’s education like to stick with safe debt options such as traditional insurance plans or post office schemes for this goal because they offer capital safety. But safety is usually accompanied by modest returns, so doing this can result in your child’s education corpus falling well short of target with inflation over time. Traditional ‘child’ insurance plans offer just 5-6% annual returns. Returns from post office schemes such as the NSC/PPF and Sukanya Samriddhi Yojana are healthier at 7.9% and 8.4% respectively. But even these may barely match inflation in education costs. This makes a sizeable equity component essential to get to your child’s education goal.

The higher return potential of equities also reduce the amount of savings you will need to set aside towards your child’s education. At an 8% return, to get to ₹95 lakh in 15 years’ time in the above example, you will need to invest roughly ₹27,500 a month. But at a 11% return, the monthly investment reduces to about ₹21,000.

But equities need a long runway to deliver decent returns and can wreak havoc with your capital for horizons less than 5-7 years. So, to ensure that equity bets pay off, you need to make an early start on your child’s education investments, ideally starting when he/she is 3-5 years old.

Have a dollar component

If you have your heart set on a foreign college degree for your child in the western world, you can budget for lower inflation in college fees, at 3-4% a year. But one factor that can throw your plans off kilter is the rupee depreciating against foreign currencies. The rupee has typically depreciated by 3-4% annually against the dollar in the last decade. Investing a portion of your child’s education portfolio (say 10-15%) in mutual funds that invest in U.S.-listed stocks can help you gain from the rupee depreciation and hedge this risk.

Look beyond ‘child’ plans

Financial product sellers in India are well aware that children’s education is an emotional issue for parents. They promote a wide range of ‘special child plans’ that are long on slick packaging and short on benefits. So, before investing in a ‘child plan,’ the first question to ask is if a plain-vanilla product will not do better for your child’s education.

Here are some specific red flags to avoid. Child endowment and money-back plans from insurers with a return guarantee usually offer very low returns to make up for the safety. They are avoidable as they may fail to keep up with inflation. Many of these plans, strangely enough, bundle in a life cover for your child. What you need, instead, is an adequate term insurance cover for yourself and other breadwinners in your family, so that your child’s education needs are met even if you aren’t around.

Mutual funds schemes that are specially designated as ‘child plans’ often carry five-year lock-ins and exit loads which prevent you from switching out in the event of the fund lagging its peers. Plain, aggressive hybrid funds or multi-cap equity funds make for a far better choice, offering the same return potential with greater flexibility. Overall, a combination of post office schemes such as NSC/PPF and SIPs in two to three multi-cap equity funds and a generous term insurance cover for the breadwinners , are the essential ingredients to make the dreams for your child come true.

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Printable version | Apr 17, 2021 4:36:32 PM |

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