As the cost of higher education increases, a detailed look is necessary to devise ways of achieving the financial goal of investing for your child’s future
The cost of higher education has risen phenomenally in the last few years and has increased much faster than the income of parents. For most parents, providing the best higher education to their children has become the most important financial goal overtaking retirement planning. Let us look at the roadmap to achieving the financial goal of investing for your child’s future.
Plan for your child’s education
First try and estimate the money you would require for your child’s education. To estimate the money you would require for your child’s education, you first need to decide the date when you would want the money and the amount you would require. Find out the present cost for the specialisation course/ education degree your child may be interested in pursuing.
Then apply an inflation rate of 8 per cent to the current cost to arrive at the future cost. So, for example, if your goal is to make your child do an MBA, you first need to know the present cost of MBA. If he is studying in school and would be studying for the next 10 years before pursuing an MBA, you will have to arrive at what the cost would be after 10 years. For this, you have to apply an average inflation rate of 7.5-8.0 per cent for 10 years to the present cost of doing an MBA. For example, any education course costing Rs 10 lakh today, at an inflation rate of 8 per cent would double to Rs 20 lakh in nine years. Therefore, you need to have a financial plan that would help you save Rs 20 lakh in the next 10 years.
Says Pankaaj Maalde, a certified financial planner, “If a person’s investment timeframe is long, then he should allocate more towards equities. But if his investment horizon is shorter, he should invest in debt funds.” “So those with 3-5 years’ investment horizon should not invest in equities. They should invest in a three-year fixed maturity plan or a monthly income plan with a growth option. Those with an investment timeframe of five years and above could consider equities and should select a balanced fund that allocates 65-70 per cent of the money in equities and the remaining 30-35 per cent in debt,” added Maalde.
Investment strategy
Investing should depend on your age, risk profile and the time period you have for investments. Money market instruments will give you liquidity and protect your principal but returns are comparatively lower. Bonds provide income and a moderate degree of risk to principal. Stocks provide quick growth but also carry high risk.
Ask yourself if you are risk averse or risk tolerant? Do you have assets to fall back on if you get into a crisis or an emergency situation?
Buy adequate insurance
It is very important that you have a pure term insurance policy, an accidental disability insurance policy and a critical illness policy. This is because, in case you contract a dreaded disease, not only your health will get affected but also your ability to work. In case your income stops, you won’t be able to meet your financial goals.
Don’t go for fixed deposits and traditional insurance policies
Fixed deposit rates have been falling and in the last one year, banks have cut interest rates for one-year deposit rates by an average 130 basis points. Similarly, for all other tenures too, the deposit rates have fallen by the same range. Investing through fixed deposits will not help reach your financial goal as they do not beat inflation nor are they tax efficient. Similarly, if one looks at traditional insurance policies including child plans or money-back plans, the internal rate of return (IRR) varies between 2 and 6 per cent. One should avoid fixed deposits and traditional insurance plans as they give lower returns and come with high lock-in. On the other hand, unit linked insurance plans (Ulips) come with high charges and, therefore, only those that have a longer investment horizon, say at least 8-10 years, should consider Ulips. Otherwise, you will fall short in meeting your financial goal.
Do not invest a lump sum in equities
Take the systematic investment plan (SIP) route to invest in mutual funds as it helps in rupee cost averaging. Rupee cost averaging is an approach in which you invest a fixed amount of money at regular intervals. This, in turn, ensures that you buy more shares of an investment when prices are low and less when they are high. By investing on a fixed schedule, you avoid the complex or even impossible duty of trying to figure out the exact best time to invest. The rupee cost averaging effect averages out the costs of your units and hence lessens the results of short-term market fluctuation on your investments.
What if your timeframe is short and you cannot accumulate large funds?
There may be many parents who have not started saving early and in the next five years require Rs 15-20 lakh for their child’s education. “In such a scenario, a parent can consider withdrawing money from the employee provident fund (EPF) or a public provident fund (PPF) when the funds are required as both allow withdrawals. Also, if he/she has invested in real estate, the property can be sold. An education loan can also be considered,” added Maalde.
http://www.mydigitalfc.com/personal-finance/saving-prudently-your-child%E2%80%99s-education-752
