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Two things every parent should know while planning for child education

Sneha and Amit have just welcomed their second bundle of joy. The family is ecstatic and worried at the same time. They are busy redeeming funds for nursery admissions due next month for their first baby.

The couple began investing Rs 5000 a month in equity mutual funds at the time of their son’s birth. They managed to earn approximately Rs 2.2 lakh through SIP route in three years, thanks to the bull markets.

This amount looks sufficient today but may not work for their second child’s nursery admission, considering the high inflation. The cost of education is rising to the extent of becoming unaffordable for the average Indian.

Nursery class fees in Delhi/ NCR private schools goes upto Rs 2 lakh, comparable to the annual fees for an engineering course. When it comes to medical courses, the amount is even higher.

Fees for Engineering course

Rs 2-3 lakh/year

Fees for Medical degree

Rs 4 lakh/year

Fees for CA degree

Rs 50,000

Parents tend to look at short term goals and are mostly unprepared for their children’s higher education. They end up stretching their finances by borrowing, repayment of which may be beyond their limit, and even pledging or selling their assets.

As per the data compiled by the Indian Banks’ Association (IBA), the total outstanding education loan at end of the fiscal 2016-17 stood at Rs 67,678.5 crore, of which Rs 5,191.72 crore was NPA.

These figures reiterate that most families are not in a situation to repay the education loan. The data may be holistic but surely reflects the fact that many families would have taken the decision of loan at the last moment because they had not planned early.

Are you financially prepared?
The question lurking for every parent is the same. How well are they prepared for their child’s college expenses. You may be saving a great deal today with a long term perspective butthere aretwo important aspects that cannot be missed.

a)Have you factored in inflation
b)Are you investing in growth asset

If your investments meet these two parameters, it will be easier for you to achieve your financial goals.

How to begin
First, identify the current cost of education for your child. Then consider 10 percent inflation while calculating your goal for his college fees. There are some useful education calculators available online. This calculator also tells you your readiness score to meet child education cost and how much you need to save monthly to achieve this goal.

For example: A B.Tech course from IIT Delhi costs around Rs 2-3 lakh per year including heads like campus maintenance, hostel fees, mess charge, etc which vary as per the student’s family income. With the help of the education calculator, you can come up with the estimated future cost.

Which means an engineering course that costs approximately Rs 12 lakh at present, will cost about Rs 50 lakh in next 15 years. Same is with other courses like medical. If the current cost of learning medicine stands at about Rs 20 lakh, you will have to create a huge corpus of Rs 83.5 lakh to achieve the dream.

The key lies not just in starting early but in choosing the right investment. Ideally, you should begin investing right at the birth of the child to give enough time to your investments. Choosing growth assets is the second step.

Where to invest
Your choice of investments can make or break your growth strategy. Assets are broadly of two types- growth and defensive.

Growth assets include investments such as shares, alternative investments and property. They carry higher levels of risk but have the potential to deliver higher returns over longer period of time.

Defensive assets include investments such as cash and fixed interest. They tend to carry lower risk levels and, therefore, are more likely to generate lower levels of return over the long term.

For long term financial goals like children education, growth assets are expected to provide better returns.

Expenses to be considered
Besides the course fees, there are costs like books, transportation, coaching which need to be factored in. With time, these costs will also go up. Interestingly, in some cases the coaching can be costlier than the course itself.

Also, other vocational courses like languages, law and social studies have many takers today. Evaluate the current fees and related costs to plan for your child’s dream.

Among other popular international courses, creative art and design has a growing demand.

You need to create a special buffer if you are planning to send your child abroad. If your child plans to do his engineering course in the US, the average tuition fees comes at about 60-80 lakh INR.

If your child plans to horn his skills in Business & Administrative Studies from the University of London, you will have to shell out approximately 5.26 lakh INR (5820 pounds).

Factors to keep in mind
Investment option should depend on the age of the child. If the child is beginning to enter school (3-4 years old), the investment strategy should be aggressive than for a parent whose child is ending school (15-16 years old).

By aggressive we mean, more exposure to stock market-based options like mutual funds, ULIPs. Equity works best for a horizon of above 10 years. For goals between 1 and 3 years- fixed income options like bank FD, short term debt funds can be chosen.

Mutual funds
Equity-based mutual funds can be great vehicles to achieve your child’s dream. In order to reach at the corpus required to fulfil your child’s expensive education, the key is in starting early that too systematically. Mutual fund investment through Systematic Investment Planning (SIP) is the best way to create wealth, though it comes with its own share of risks.

Large-cap equity mutual funds have the potential to garner good return on investment in the long run. However, choosing hybrid funds for child education can balance the portfolio. Mutual funds offer flexibility to withdraw or stop the investment anytime during the tenure.

Some fund houses have ‘Child’ or ‘Children’ in their name which may restrict the investor to withdraw SIP from such funds. As a matter of fact, any equity fund can fulfil your financial needs, provided you follow a disciplined approach. One can consider consulting a financial advisor before choosing a mutual fund. In order to beat inflation, you can consider increasing the SIP amount by 10 percent every year.

Equity-based balanced funds

5 years return (%)

HDFC Children’s Gift


HDFC Balanced


ICICI Child Care- Gift Plan


ICICI Balanced


UTI Child Care Fund


However, with mutual funds one cannot safeguard future mishaps. An insurance plan can help you cope up with the financial loss in case of the breadwinner’s untimely death. This is important considering an unfortunate event could derail all the planning and wipe out the savings towards other survival needs.

Child plans can be helpful
Child insurance plans come with the dual benefit of insurance and investment. Buying a child plan with interim or terminal bonus, as per the need, can help you plan your child’s future with security. Some of the plans offer reversionary bonus that is compounded every year, which can help in getting a bigger corpus.

There are many child insurance plans under the ULIP category. Child plans offer equity exposure along with the added tax benefit of 80C. With the recent change in long term capital gains, ULIP make up for ideal investment for long term. People who tend to get into premature withdrawals can opt for Child ULIPs. The 5 year lock-in period can help them stick to their goals.

Term plans should be a must
In case you do not want to buy a child insurance plan, you can choose a term insurance plan to safeguard all your investments. Specially, in the event where the insured (father/mother in this case) has an untimely death.

Also a term insurance plan makes great sense if you have a dependant family. You can buy a cover atleast 10-12 times of your annual income , also considering any home or personal loan that you are liable to pay, child education cost and other major future expenses. Check out life insurance calculators to find out how much cover they need to maintain their current lifestyle, payoff the loans and for major expenses like child education, wedding, etc.

It’s also advisable to name your spouse as the nominee in order to safeguard your child’s financial future. Whatever investment options you choose, the key is in starting early and having the right life insurance cover to mitigate risks associated with untimely death or disability. The sooner you start investing, more time you will have to reach your targeted goal.
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