With education costs on the rise, it’s becoming increasingly imperative to financially plan and accumulate adequate corpus to facilitate your child’s higher education.
As a parent, providing best education to your child is of paramount importance, given that it plays a major role in shaping their future. However, with education costs on the rise, it’s becoming increasingly imperative to financially plan and accumulate adequate corpus to facilitate your child’s higher education.
Here is a five-step plan to help you devise a strategy to fund your child’s higher education, whether in India or abroad:
Calculate expected cost
Calculate the expected cost of your child’s higher education, including tuition fees, living expenses, cost of travelling and other miscellaneous fees. While estimating the target corpus, remember to factor in inflation cost, as failure to do so would result in accumulation of insufficient corpus. Also, if you are planning to send your child abroad for higher education, ensure you factor in rupee depreciation as well while calculating the estimated corpus.
Decide upon the source of funds
Even if you are planning to avail an education loan, remember that most lenders usually fund up to 85-95% of the course’s cost, implying that the margin money of at least 5%-15% would have to be paid by you. With a timely start and proper financial planning, you can fund the cost through mutual fund SIPs, or opt to partially invest for raising margin money and take an education loan for the rest of the amount. This would also depend upon the number of years your child is away from starting his/her higher education.
Start investing early
Start investing for your child’s higher education as soon as you can. The more you delay, the higher would be the chances of either accumulating insufficient corpus or straining your finances in process. Consider investing in equity mutual funds if you are over 5 years away from your goal. In terms of returns, equity as an asst class has consistently outperformed both inflation and other asset classes by a wide margin over the long term.
Consider investing in direct plans of mutual funds, as these involve lower expense ratio, higher NAVs and higher returns when compared to regular plans. Visit online financial marketplaces to choose the right plan. These platforms offer automated advisory services, which assist the investor, whether new or existing, in building the right portfolio to achieve the set financial goals. Additionally, they provide fund recommendations, market insight, tools and calculators etc. to make appropriate investment decisions.
Review investments periodically
While investing for your child’s higher education corpus or other financial goals, periodically reviewing your portfolio is crucial. You can compare your funds’ performance with its peers and benchmark indices. Periodically reviewing your portfolio would assist in analysing the chosen funds’ performance and take corrective actions in case the funds have been consistently under-performing for at least 2-3 years.
To evaluate a fund’s performance, you can compare its performance with the benchmark indices and also with other funds in its category. Switch to other better performing funds to ensure that the target corpus’ creation does not get hindered due to the chosen funds’ under performance.
Shift corpus as you near the goal
Given the long-term investment horizon usually involved in accumulation of your child’s higher education corpus, and the volatile nature of equity funds, especially in the short term, it’s necessary to shift your corpus to less risky avenues once you are just 2-3 years away from achieving your corpus. Consider shifting to debt funds, as these offer higher degree of liquidity and capital protection. Liquid funds and ultra-short duration funds usually do not involve exit load, whereas most low duration and short duration debt funds charge up to 0.5% as exit load.
(By Radhika Binani, Chief Product Officer, Paisabazaar.com)