Higher education is becoming more and more expensive. If you wish to equip your child with that much coveted post-graduate degree, begin saving now. Here?s a detailed, step-by-step guide to planning for your child?s future
Children are the light and the joy of our lives. But in this age of privatisation of higher education and with it, mounting costs, they also signify a heavy financial burden. Most of us are not going to be able to meet this cost if we wake up to it only when our child turns 15 or 16. Only by beginning to save from an early age ? as soon as the child is born or soon after ? will we manage to reach our goals comfortably.

Set your goals
The first, and very important step, in saving for your child?s future is goal setting. Goals lend concreteness to our plans. They also help us initiate the process of saving and stay on course.
Broadly, this is how you determine how much you need to save each month to fund your child?s education. First, identify targets. Now, you could argue that it is impossible to predict whether your child will want to pursue a course in architecture or in business management, or any of the myriad other career options that are likely to mushroom in future. The point is valid. Nonetheless, it would help if you did a survey of how much today?s leading courses cost (See table: The earlier you begin?). Assume that your child will need money to pursue at least an undergraduate and a post-graduate course (in all likelihood, from private institutes, which are expensive). She will also require coaching to prepare for the entrance exams of at least a couple of courses. These, too, don?t come cheap.

What will the cost be
By the time your child comes of age for pursuing these courses, the cost of education is likely to have shot up. The historic rate of inflation in India has been 7 per cent. The rate of increase in the cost of plain-vanilla university courses such as a B.A., B.Sc., or B.Com is likely to be at par with the long-term inflation rate. But the cost of premier courses from premier colleges is likely to shoot up at a higher pace. According to Praveen Puri, head of South Delhi-based Skyline Business School, which offers professional courses both at the undergraduate and postgraduate level, ?Over the next five to 10 years, the cost of professional courses is likely to grow at anywhere between 10-15 per cent annually.? He further adds that in future, i.e., 10-15 years later, cost of education could go the telecom way. At present, the cost of one teacher is borne by about 60 students. In future, using broadcast technology, one teacher could teach 10,000 students or more, leading to a drastic drop in costs.
While this may happen, one can?t entirely depend on it. For safety?s sake, let us presume that the cost of education will rise by at least 10 per cent annually. According to Pune-based financial planner Veer Sardesai, ?By no means should you assume a rate of increase that is lower than the average inflation rate for the economy, i.e., less than 7 per cent.?

The right investments
Next, you need to decide which investment instruments you should use in order to meet your goals. According to Sardesai, ?Two products are very useful for such long-term savings ? equity and PPF.? Sardesai suggest using index funds for making equity investments. Specifically, you could divide your money between an exchange traded fund (say Nifty BeES from Benchmark Mutual Fund, which you can buy from your stockbroker), and an index fund (say, Franklin Index Fund, which has very low tracking error).
The return on equity, specifically on Sensex stocks, has been 17 per cent historically. If you had deposited money every month since 1979, this is the average annual return you would have earned. Again, using conservative estimates, we will assume an average return of 15 per cent from these instruments.

The problem with equity investments, however, is that they tend to be volatile in the short term. If you have to withdraw money from your equity investments at a time when the market is in a bear cycle, you will not get the right value for your money. Hence, you should also create a contingency fund using a PPF account. You could withdraw money from this account in case you need it at a time when the markets are at a low level.

The government allows you to contribute Rs 70,000 per head in a PPF account. So your wife and you could together contribute at least Rs 1.40 lakh per year. Contribute this amount for 15 years and you would end up with Rs 21.22 lakh. If you start at the age of two, by the time your kid reaches college, the PPF account would have matured, and you would be able to withdraw the full amount.

How much each month
If you look at the table (The earlier you begin?), here?s what we have done. We have calculated total costs (tuition and boarding) for major courses. We have then calculated how much these courses will cost when your child comes of age (assuming she is two years old today). We have compounded costs at the rate of 10 per cent over the time span available. In the last column we have calculated how much you need to begin saving each month to meet these targets (using Excel?s PMT function; you, too, could learn how to use the PMT function from the Internet, in case you need to do these calculations yourself, using the following link: http://www.ehow.com/how_2095624_calculate-future-value-investment-excel.html).
Imagine that your child will need to prepare for an engineering exam; he will then do the engineering course; and lastly, he will pursue an MBA. Add up those costs (from the last column of the table: How much you need to save each month). The total sum is what you need to begin saving each month (in addition to the money you put in your PPF account, which you should treat as a contingency fund).
You could do your own calculations ? for other courses, other time periods, and for other goals such as marriage ? using the same methods and similar assumptions (regarding rate of inflation and return on investment).

Insure her future
Besides saving each month, you also need to safeguard your child and family against unforeseen mishaps (such as the breadwinner?s demise) by buying insurance cover. Buy a term cover, the cheapest form of insurance.
How much should the sum assured for your insurance policy be? Says Sardesai: ?If you have taken loans, then you must have enough life insurance to cover those loans. In addition, you need enough insurance cover to meet 70 per cent of your family?s living expenses. Assume that in case of an eventuality, your family should get a sum of money that will earn a return of about 8 per cent (if they put the money in assured return schemes). That 8 per cent return should be equal to 70 per cent of your family?s living expenses.?
(Why should only 70 per cent of the family?s expenses be covered through insurance? If one adult passes away, says Sardesai, then the size of the family reduces, and so does its expenses.)

He further adds: ?Someone might argue that he wants a larger term cover so that his child may have the best of education, and his family may live in comfort. The problem with this approach is that the premium on the term cover is then likely to become very high. Then, if he lives (the probability of which is higher), he will probably not be able to build the kind of corpus required for providing his child the best of education. In other words, wealth creation will take a hit. So, one has to strike a compromise and buy only enough insurance so that the child is able to get a basic education.?

Such a child (who has lost the breadwinner) may then have to take recourse to other options to finance her higher education, such as an education loan or a scholarship. Alternatively, a part of the corpus received from the term insurance plan could be used to fund the child?s education. Since the child would start earning soon, she would either repay the money to her mother or bear a part of the family?s expenses.

Avoid child insurance plans
Earlier, we have suggested that you use a combination of index funds and term cover to achieve your goal of funding your child?s education. A number of child insurance plans are also touted in the market as the right vehicles for funding a child?s education. Avoid them.
Being marketed in the garb of child plans, these plans are variants of an endowment product, a moneyback or a Ulip. Such plans do not provide wholesome solutions for your kids? needs.

The biggest shortcoming of such plans is the lack of flexibility. While they promise assured returns at a certain age, following the do-it-yourself way fetches better returns. Such plans levy high mortality charges as most of them promise waiver of premium in case of any eventuality. Moreover, one has to stick to just one fund manager for a period as long as 16-18 years.
?The best way to plan for your child is to set goals, and do right asset allocation. While equities can give you the best returns over a long period, fixed-income instruments give your portfolio some sort stability and surety,? says Surya Bhatia, a Delhi-based financial planner.

Finally, the importance of planning in advance and saving for the child?s needs can?t be over-emphasised. But if done meticulously, most middle-class families can provide adequately for one child. But if one has two or three children, then costs go up dramatically.

In particular, the young family?s current expenses become so high that its ability to save for the future from an early stage suffers a setback. And if it can?t compound its money from an early stage, it is unlikely to be able to meet those big-ticket expenditures that crop up later in children?s lives. Therefore, these costs must be borne in mind before a young family decides to grow in size.

Reaching for the stars
Doctor, engineer, CA… all these are highly respected and evergreen career options, but the Kaisthas have something else in mind for their five-year-old son Rahul. ?Born in this globalised era, the whole world is the playground of this generation. I would want my son to opt for a new-age career. And for that he needs to have the right kind of exposure,? says mother Shalini Kaistha.
The Kaisthas stay in Gurgaon and have invested in several plans to make sure that Rahul?s dreams are not squashed by financial obstacles. ?I have bought a Children?s Plan from Birla Sun Life Insurance that will give Rahul Rs 1 crore when he turns 18. In case something happens to us, then also he will get this sum and the premiums will be waived off,? says Rahul?s father Deepak Kaistha, partner, global outreach, Planman Consulting.
Apart from this, the Kaisthas have also done their retirement planning so that they don?t have to depend on their son in their old age. They keep investing for their son as and when opportunity comes their way. Recently they invested in real estate and bought another house in Gurgaon for Rahul. While the sky is the limit for Kaisthas? dreams for their child, it is only right planning and proper execution of the plan that will help Rahul achieve them.