With increasing costs of higher education, it is essential to plan for it early with proper asset allocation and portfolio re-balancing when required
As children’s education is one of the biggest cash outflows that families, such a goal requires early planning and calculated risks to generate good returns. One must plan for a projected amount that the child would require at various stages, chalk out an investment strategy and review it with the changing market conditions. Investing for child’s higher education is every parent’s priority. With increasing costs of higher education, it is essential to plan for it early with proper asset allocation and portfolio re-balancing when ever required. To build a large corpus of Rs 1 crore may seem difficult, but by investing Rs 10,000 a month in systematic investment plan of an equity fund for 16 years at 15% return can generate that corpus.
Investment for children’s education need must comprise a combination of mutual funds through systematic investment plan with equity and debt exposure, direct equity investment, child plan from an insurance company and even real estate. First of all an individual must identify the goal, the corpus required, and the time frame of investment. Besides these factors, one must understand the risk profile of the investment, especially if it is market-linked.
First and foremost, Public Provident Fund (PPF) is ideal for risk-averse investors to invest for children’s future needs, as it guarantees the principal invested and returns. One can invest up to Rs 1.5 lakh in PPF in a financial year. At present, the interest rate is 7.6% compounded annually. When an individual opens a PPF account for his minor children, the account of the child is maintained under the guardianship of the parent and both accounts are seen as one and the overall limit cannot exceed Rs 1.5 lakh. Either of the parents can open the PPF account on behalf of the minor.
A regular systematic investment plan of mutual fund should be considered to accumulate funds for children’s education or marriage needs. However, unlike insurance, mutual funds do not have the protection, which is an important component in a child plan. One should reduce risk by taking away investments from high-risk products to a safer option when one needs to pay the maximum amount for higher education. This will prevent the incidence of loss in case some risky investments are prone to loss in a volatile market.
Insurance products are also a good way to save for your child’s kitty. One can choose between endowment and unit-linked insurance plans, which give tax benefit under Section 80C of the I-T Act, where premiums up to Rs 1.5 lakh are allowed as a deduction from your taxable income every year. Under Section 10 (10D), the benefits you receive from this plan are exempt from tax. Insurers also offer single premium child plans and even customise the policy according to the requirement of the child. In child insurance plans, one can invest a fixed amount as a premium for a specific period and get the fund value at the end of the period.
The risk cover in child insurance plans is on the earning parents and not on the child and all the maturity benefits continue irrespective of the death of the life insured. However, like all insurance products there are costs involved like mortality charge, premium allocation charge, policy administration charge, fund management charge and surrender and fund switch charges.
Analysts say that if one needs lump-sum money for one’s child’s higher education, one should go for child traditional endowment policies. If the child is completely dependent on the parent’s money, it makes sense to go for a term policy. This will take care of the financial need in case of untimely demise of any of the parent.
If your savings are not enough, banks offer education loans to students who take admission in promising graduation and post graduation courses in good universities. The course for which the loan is taken should be a full time course. Education loans, like other loans can either be fixed rate or floating rate loans. Fixed rate loans have higher interest rate.
Under Sec 80E of the Income Tax Act, one can claim a deduction of the entire interest paid on the education loan in a year. One can only claim interest as a deduction and principal repayment is not allowed.
Only the person who has taken the education loan can avail the benefit and the loan should be from an approved financial institution. The deduction of interest is available for 8 years, beginning from the year in which you start making repayments/interest payments, whichever is earlier. Most education loan repayment begins after a moratorium period, which is one year after the end of studies or six months after securing employment, whichever is earlier.