At an average running inflation rate of 10%, a four-year engineering course that costs Rs 8 lakh today is likely to set you back by Rs 17 lakh in eight years’ time. By 2030, the same would cost more than Rs 30 lakh. For engineering and medical aspirants, the costs start even while the student is in school. Coaching institutes charge between Rs 80,000-1 lakh a year to prepare students for the entrance exam.
“Higher education costs have the highest inflation rates. Parents need to realise it is going to be an expensive affair,” says Nitin Vyakaranam, CEO, Arthayantra. Our story is aimed at parents who are saving for their children’s education. The investment options before them will depend on the age of the child. We list the most appropriate investment options for three broad age groups and the strategies to be followed at each stage. Choose the one that fits your situation.
Higher education costs may be rising at a fast clip, but Delhi-based Balbir Kaur is not perturbed. Balbir and her husband Puneet are saving for their son Jivvraj’s higher education (see picture). They started small last year with SIPs totalling Rs 5,000 in three mid-cap equity funds. If they continue with that amount and their funds earn 12% a year, the couple would have Rs 20 lakh by the time four-yearold Jivvraj is ready for college. But Balbir has a strategy in place. “From this year, I have increased my SIP amount to Rs 10,000 a month. We plan to keep increasing this every year as our income goes up,” she says. If they hike the SIP amount by 20% every year, they will accumulate over Rs 1 crore in 13 years.
The benefits of an early start cannot be stressed enough. Tanwir Alam, MD, Fincart, says, “The multiplier effect in the power of compounding comes from the investing time horizon; longer time horizons have a higher multiplier effect.” Starting early also put lesser burden on your finances because it requires a smaller outflow. Worse, you may not be able to invest in certain assets if the time horizon is short. “If you delay investing, it reduces your ability to take risks,” says Vidya Bala, Head-Mutual Fund Research, FundsIndia.
The investment strategy changes if your child is a little older. Since you have only 5-9 years to save, the risk will have to be lowered. The ideal asset mix at this stage is 50% in stocks and 50% in debt. Go for balanced funds that invest in a mix of stocks and bonds. If your risk appetite is lower, monthly income plans (MIPs) from mutual funds can be a good alternative. These funds put only 15-20% of their corpus in equities and are therefore, less volatile than equity or balanced funds. However, the returns are also lower. Investors should also note that the returns from equity and balanced funds are tax free after a year, the gains from MIPs are taxed at 20% after indexation benefit.
For the debt portion, start a recurring deposit that would mature around the time your child is scheduled to apply for college. If you are in the highest tax bracket of 30%, avoid RDs and start an SIP in a short-term debt fund. These funds will give almost the same returns as FDs but are more tax efficient.
It is also important to review the progress of your investment plan. Keep monitoring the cost of education on a yearly basis and accordingly adjust your investment requirement.
For parents of teenaged children, the investment strategy should focus on capital protection. With the goal barely 1-4 years away, you cannot afford to take risks with the money accumulated. The equity exposure at this stage should not be more than 10-15%. Kolkata-based Sanat Bharadwaj (see picture) started investing in a mix of mutual funds and bank deposits for his son Siddhant’s college education 12 years ago. But now that the goal is just a year away, he has shifted 75% of the corpus to a bank deposit.
This shift from growth to capital protection is critical. The 3-4 percentage points that equity investments can potentially give is not worth the risk. A sudden downturn in the equity markets can reduce your corpus by 5-6% and upset your plans.
As mentioned earlier, the cost of higher education is shooting up. Many parents who started late or chose the wrong investment vehicles may find themselves woefully short of the target. If you face a shortfall, don’t be tempted to dip into your retirement corpus to fill the gap. This is a mistake. “Your retirement should be given priority over your kids’ education,” says Rohit Shah, CEO of Getting You Rich. Instead, you should take an education loan with the child as a co-borrower.
Apart from keeping your retirement savings intact, it will inculcate a savings discipline in your child after they take up a job. The repayment starts after a 6-12 month moratorium when they complete their education. Banks offer loans of up to Rs 20 lakh for courses in Indian institutes. If your child is keen on a foreign degree, it would require a larger corpus. While banks are willing to lend up to Rs 1.5 crore for foreign courses, they insist on part funding in the form of a scholarship or assistance.
When saving for your child’s education, remember that the financial plan depends on regular contributions. But what if something untoward happens to you? The entire plan can crash. The only way to guard against this is by taking adequate life insurance. A term plan does not cost too much. For a 30-35 year old person, a cover of Rs 1 crore will cost barely Rs 10,000-12,000 per year. That is too small a price for something that safeguards your biggest dream.