Education costs are rising by the day, with higher education costing in some cases even more than a standard home in a metro city in India. Moreover, with avenues opening up for Indian students abroad, the cost of education for those wanting to pursue their studies outside the country has also significantly gone up.
It’s not enough to just dig in to regular savings to fund your child’s education. And even though Education Loans may be easier to avail now than before, they have upper ceilings in most cases, beyond which costs have to be borne by the parents.
The wise plan would be to start saving, but not just when you child is on the verge of going to college, but years, rather a decade or two before that so you have a sizeable corpus in hand for whatever it is that your child wants to pursue.
1. Calculate How Much You Need
Knowing how much you will exactly need to fund your child’s education is an impossible feat. But one can be ready with a large part if not all of the amount required for your child’s education. The best way to calculate is to look at current costs and equate it with an inflation calculator.
Let’s assume your child is of 2 years currently and you assume he/she will start their higher education at 23. Taking an average cost of Rs 15,00,000 for a Master’s Degree, you will be required to have a corpus of Rs 62,10,844 by the time you child starts thinking of colleges, keeping an inflation of 7% in mind.
So calculate your goal accordingly, and if you have more than one child, calculate for both. Make sure your investments project enough surplus to take care of your child’s education and your other needs in the future.
2. Invest In Mutual Funds
Mutual Funds are a great way to build wealth and a great option for creating a good corpus for your child. Since saving for your child’s education involves saving for a longer tenure, opt for funds that are heavily invested in equity as they tend to give you better returns and will help you overcome any market corrections that take place in a longer tenure of 15 to 20 years.
You can also opt to create an SIP at first and gain good returns over a moderate period of 5 to 7 years. You can then re-invest the money in other equity schemes. This way you will work at generating long-term returns while maintaining risk under control.
Remember though that from this year onwards, equity funds will attract an LTCG tax of 10% if gains are above Rs 1 lakh in a financial year.
3. Endowment Child Plans
These plans work like regular endowment plans but are specifically tailored for a child’s future. Apart from being an investment option, they also act as insurance to provide financial support to the family for the child’s future if the parents meet with an unfortunate death.
Insurance plans designed for the child do not usually insure the child but the parent who has a minor child to provide for. Remember to choose the investment amount carefully and just because the plan entails insurance in the event of death, the amount assured should not be the lone liquid money you leave for your family. Make sure you have an alternate term plan to take care of that, so the money from this investment is used for the child’s education.
4. Public Provident Fund
Your child’s education should in no way come in the way of your retirement corpus. So don’t just hold one PPF account if you already have one. Open another one, with the aim that it will be useful for your child’s education. What’s more is that you will get a tax benefit of up to Rs 1,50,000 under Section 80C for investments under PPF. Since the minimum lock-in is 15 years, you will not be tempted to break the fund so easily, and the investments are monthly, so you do not need a lump sum at once.
5. Diversify Your Investments
Just like you would for your general personal finance portfolio, when aiming to achieve a goal like securing a child’s education needs, you need to assess how much you can contribute towards each investment and see what works best for you. One investment may be enough for some, while some may prefer to spread out their savings and lock-in the desired amount they wish to save across various schemes.
For instance, if you think you will need funds for your child’s undergraduate as well as post-graduation, plan investments that have different maturity dates. You could also assess how much you would need at a given time and invest that amount accordingly. Timely planning will ensure that you won’t have to break into your retirement corpus or your contingency fund for sponsoring your child’s education and vice versa. Plan well and stay ahead.
(The writer is CEO at Bankbazaar.com)