Five steps to financing your child’s education abroad

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New Delhi | Published: September 24, 2018 1:29:17 AM

To find out the size of corpus needed, add travel costs, living expenses to the tuition fees. Take into account inflation and rupee depreciation too

Five steps to financing your child’s education abroad (Illustration: Shyam Kumar Prasad)

For most parents, sending their child abroad is a herculean financial task, with even lifelong savings not being sufficient for many. However, with proper and timely planning, you can ensure that your lack of finances do not stand in the way of your child’s educational dreams. Here are five steps that you need to follow.

Estimate the expected total cost

While calculating the entire course’s cost, make sure you take into consideration not just the tuition fees, but other expenses such as living expenses, cost of travelling and other miscellaneous fees. This will help in knowing the approximate corpus that would be required by the time the child reaches the age for higher education. Parents must remember to factor in inflation and rupee depreciation as well, while calculating the corpus amount.

Decide upon the source of funds

Next step is to decide on how to go about funding this cost and also the proportion of your contribution in it. While education loan is an option, keep in mind that most lenders usually fund about 85% of the course’s cost, implying that the margin money of at least 15% would have to be paid by the family. You could solely fund through timely investments in mutual fund SIPs, or partially invest and take education loan for the rest. This would depend upon the number of years your child is away from reaching the age of 18.

Start investing as early as you can

No matter what your child’s current age is, start investing as soon as possible, to accumulate a good amount of corpus. The more you delay, higher would be the chances of non-accumulation of desired corpus, or your finances would be highly strained in order to achieve that corpus.

For instance, if the expected total cost of sending your child abroad is `1 crore, and your child is aged five years currently, implying you have an investment horizon of 13 years ideally. So, an equity mutual fund SIP of about `26,000 monthly would suffice, with expected returns of 12% . Whereas, if your child is currently aged 12 years, availability of lower investment horizon of just six years would push up your SIP amount to `95,000.

Review investments periodically

Parents must keep reviewing their investments periodically, ideally at least once or twice a year, by comparing the mutual fund’s performance with their peers and benchmark indices. Periodic review would assist in spotting the non or under performing funds, and these can be timely replaced with better performing funds, to prevent any damage or hindrance in creation of desired corpus.

Shift corpus to less risky avenues as you near the goal

Since accumulating the corpus would involve an investment for 10-15 years, you wouldn’t want to take any risk with your accumulated corpus, as you approach the goal. The volatile nature of equity mutual funds often necessitates the need to shift your corpus to less risky investment avenues. Suppose your investment horizon was 15 years and you are just 2-3 years away from reaching your goal, consider shifting your accumulated corpus into savings account or debt mutual funds, since these provide high degree of liquidity and safety. High yielding savings accounts are offering interest rates up to 7.25%, along with the highest form of liquidity.

By- Manish Kothari. The writer is director& head of mutual funds,

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