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. The cost of higher education is already high, increasing by 10-12% per year. Parenthood is one of the most critical financial opportunities that families should consider—a four-year engineering course costs around Rs 6 lakh at the moment.
In six years the price will probably reach Rs 12 lakh. By 2027, it would cost Rs 24 lakh to obtain an engineering degree.
Previous generations have had it easy. The 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: will they be able to finance their children’s higher education? They can do this if they plan and take the right steps. Our cover story examines the challenges parents face 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 it is possible to save that amount with a SIP of Rs 9000 for 18 years in an equity fund offering a 15% return. “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 for 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 even before they were born. However, some of your savings are in traditional life insurance policies that offer meagre returns of 5-6%. 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 they can offer high returns, investing in stocks is not to everyone’s liking. This year’s BlackRock Investor Pulse DSP survey shows that while Indians have a strong propensity to save and invest, they are always looking for security. Almost 52% of the 1,500 respondents said they wanted a guaranteed return on their investments.
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 will need to rely primarily on fixed income instruments, which are likely to 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 good investment, but avoid it if you need cash in 3-4 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, which is a scenario of falling interest rates that may need to be reinvested at lower rates. So, go for the cumulative payment option.
Education costs have sky-rocketed
While the government defined inflation for the last 10 years has been in the 4-8% range, the cost of education in India has increased in 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 gap and are 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 of 2 years MBA at IIM Ahmedabad is nearly Rs.19 lakhs. In 2009, it was around Rs. 4.5 lakhs – that’s a 12% average annual increase in the last 10 years.
This increase has not been limited just to post-graduation. The fees of B.tech have increased from Rs.3.6 lakhs to Rs.10 lakhs today, which is an average increase of 10% per year. MBBS fees are also up by 10% annually.
Increase in education cost in the last 10 years:
|Name of the Course||Fees in 2009 (in ₹)||Fees in 2019 (in ₹)||Yearly Growth in the last 10 years (%)|
|B.Tech||3.6 lakhs||10 lakhs||10%|
|MBA||5 lakhs||19 lakhs||12%|
|M.B.B.S ( in Pvt. colleges)||10 lakhs||25 lakhs||10%|
How much should you save for children’s education?
Before you get into how much you need to save, you first need to figure out how much money you will need when the time comes.
If this price increase trend sticks (which it looks like) and education costs continue to soar, the amount you need to have for your child’s education in the next 5, 10 and 15 years can go as high as Rs. 1 crore, and we are not even talking about overseas education here!
Expected fees of select courses over the next few years:
|Name of the Course||Expected Fees in 5 years (in ₹)||Expected Fees in 10 years (in ₹)||Expected Fees in 15 years (in ₹)|
|B.Tech||16.5 lakhs||25.9 lakhs||41.7 lakhs|
|M.B.A||30 lakhs||49.2 lakhs||79.3 lakhs|
|M.B.B.S||40 lakhs||64 lakhs||1.4 crores|
Check The Portfolio
Once your wallet is in place, 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. It would be best to find out if the 12% inflation rate you assumed is a realistic estimate. Dhawan said.
Then check if your portfolio is on track to meet the goal. Jain has an Excel sheet, which 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 increases,” 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. Watch the 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 be lagging behind your peers who have taken this direction. Don’t punish the fund for being true to its mandate.
Finally, rebalance your portfolio at the end of each year. Rebalancing is selling a better performing asset and investing the proceeds in a worse performing asset.
By doing this, you reduce the risk your portfolio might face 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 will need to 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:
|Name of the Course||SIP Amount for 5 years||SIP Amount for 10 years||SIP Amount for 15 years|
Assuming 10% returns for 5 year period and 12% for 10 and 15-year duration
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 an investment horizon of more than 12 to 15 years. 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.