Planning for the child's future is something close to the heart of most parents. So it was for Neha!
Neha started worrying about her four-year old son Roshan and her 6-month old, Puja. She was fretting about the enormous sums being demanded as 'donation' for admitting kids into school. They had paid Rs 75,000 for Roshan’s admission, and the fee works out to Rs 2,500 per month. This does not even include book, uniform, picnics etc. And there were the other expenses for activities like skating, swimming, karate etc. No wonder, she was worried. In three years, Puja will also join the school. The expenses will then be quite a packet.
Avinash, her husband, was earning decently. At 32, he still has a long working life and a promising career ahead of him. His take home at Rs 45,000 per month is decent. But Neha was worried as there are all those EMIs and expenses, which puts a strain on the purse. Many times, they stare at an empty void in their moneybox, at the end of the month.
What scares the daylights out of Neha is the children’s education expenses. Also, the college fees these days get revised year-on-year, in quantum jumps. Add to that the fact that the child may pursue arts/commerce/engineering/medicine, which is not clear right now. So, what amount to provide for, for education needs of the child becomes tricky.
As financial planners, this is a familiar territory. Let us help Neha in planning for her child’s education needs.
1. Many gravitate towards child policies. Child policies are nothing but money back policies, where the return on investments tends to be low. In case if the same policy is unit-linked, it looks broadly similar to a mutual fund scheme. Some child policies have unique features like income benefit, which is typically a rider. If the parent were to pass away, the family will start receiving a portion of the sum assured back (say 10 per cent per annum) till the end of term. This could be useful to enable the child to complete the education. But one could also take a term plan. On demise, it could give a sufficient corpus to enable the child to complete education.
So, child policies can be one part of the planning. Term plans also can be considered to hedge the life risk of parent.
2. Another strategy is to invest in child plans from mutual funds. Most of them are balanced funds. There are those which allocate more towards debt and others that allocate the bulk towards equity. These are available across mutual fund houses and can be chosen in line with the overall strategy.
3. If you want to accumulate the education kitty in safe investment options, you have PPF, recurring deposits, bank deposits, KVPs etc. Though safe, the growth of the corpus is also rather modest. However, this cannot be the only way to build the child's education corpus.
4. Mutual funds can give excellent returns, over a long time frame. A lot of people get unnerved by the short-term fluctuations that are endemic to the stock market. But the risk of losing money comes down when held on for a longtime. In fact, mutual funds have the potential to deliver a 12 to 15 per cent per annum returns, in the long-term (about 10 years). You can also invest in equity. The risk profile, here, is higher and is recommended only if you can stomach the risk.
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Projecting the cost of your child's education
It is easy to project what will be the future cost at an assumed inflation factor (say 8 per cent) for education – Rs 6 lakh needed today would be Rs 25.9 lakh.
Projecting for such long-terms, is fraught with danger – the child might end up doing a course requiring lesser or more money by way of education expenses, inflation rate could be off the mark, investment returns could be different from the one assumed or it might become difficult for the parent to consistently put aside the required investment every year. So, when a plan is created, it is a good idea to revisit the plan every year so that you can make changes in line with your goals.
The key is to start planning early, because the earlier you plan, the lower the amount to be put aside. For instance, if the target amount after 19 years is Rs 25 lakh, Neha needs to put aside only Rs 4,696 per month (assuming 8 per cent returns). The amount goes up to Rs 13,665 per month, if the savings tenure is 10 years – about 3 times more.
Let us now look at what might be helpful for Neha.
A 50 to 60 per cent allocation is recommended towards equity MFs. Equity diversified funds (with large to midcap orientation), Index funds, balanced funds and a small exposure to Gold ETFs (5 to 10 per cent of the MF allocation) could make up this portion. A 30 to 40 per cent allocation can be made to the debt investment options like PPF, bank deposits, recurring deposits etc. A 10 to 20 per cent allocation can go to insurance plans depending on what kind of plan is being contemplated – term or a child plan.
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