When it comes to sheer relevance, very few financial goals come close to planning for the education of one’s child. After all, having a high-quality education will provide your kids with a natural edge in today’s age of cut-throat competition.
In a recent comprehensive study on financial goals 45% of fathers in the 30-40 age bracket and 62% in the 40-50 age bracket named educating kids as their top “priority goal”. Retirement planning, at 21%, came in a distant second – despite growing awareness of the criticality of stepping up one’s retirement savings in today’s age of increasing lifespans and subsequently extended retirement durations.
While it is true that education costs are inflating at a supernormal rate, there is no need to panic. Over the years, we have observed that investors who follow a few simple ground rules and invest with clearly defined goals end up meeting them comfortably. The problem arises when we delay our planning or end up repeating common investing mistakes like being too conservative with long-term goals, too aggressive with short-term goals, saving in an ad hoc manner or tapping into goal-based funds to finance short-term “wants” without understanding their real impact. Over the years, the consequences of such seemingly innocuous mistakes cascade into difficult and sometimes irreversible situations.
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The key to successfully plan for your child’s education would be to start early and adopt a “bucketed” approach. Say, for instance, your child is 5 years old right now and is due to start her 1st standard next year. A smart approach would be to set up three savings buckets at this point, namely – short-term, medium-term, and long-term.
The short-term bucket would constitute the funds required to pay for the first three years of your child’s school fees. Because three years is a very short-term investment horizon that is unsuitable for achieving inflation-beating returns, you are better off provisioning for this cost from your monthly cash flows itself by planning your income and expenditures well.
Alongside this, you could work towards setting up bucket #2 to finance your kid’s education from the 4th-7th standard. For this goal, you could start a SIP in a mutual fund that has the potential to deliver 9-10% returns over a 3–4-year timeframe (such as a dynamic asset allocation fund, for instance), with an eye on setting up a dedicated corpus that you would start drawing upon once your kid hits the 4th standard. Assuming an annual expenditure of Rs. 1.8 lakh during this phase (and an inflation rate of 10%), bucket #2 needs to be worth roughly Rs 8.75 lakh in 4 years, meaning you will need to invest around Rs 15,000 per month here.
Lastly, you could invest aggressively in small or mid-cap funds (which have the potential to deliver CAGRs as high as 15% over long time frames) to create a third bucket to fund your kid’s education from Classes 8th to 12th. A back-of-the-envelope calculation indicates that you will need a sizeable sum of Rs 19 lakh for this bucket by the time your kid turns 13 – but the catch here is that you have time and compounding on your side, so a much smaller SIP of Rs 10,000 per month should suffice.
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In the above example, a well-planned monthly SIP of Rs 25,000/month for 4 years, followed by Rs 10,000/month for the next 4 can be enough to fund your kid’s entire education from classes 1st – 12th. If this seems steep – fortunately, other customized strategies such as annual step-ups can help ease the burden and allow you to start smaller and gradually increase your monthly commitment in tandem with your rising income.
In the end, the amount that you can afford to commit towards these buckets would depend upon your own income, expenditures as well as aspirations; but the simple act of “starting off” will create a virtuous cycle that you can build open over the years. A qualified advisor can prove to be an invaluable guide in this regard.
A similar systematic investing strategy could be deployed later to plan for your child’s college education. Needless to say, it is impossible to predict which direction your child would want to move in after they leave school (and so what precise outlay would eventually be required), so the plan must incorporate a base amount, but be fluid enough to incorporate variations along the way. As with any aspect of financial goal planning, customization is key. Also, the sooner you start planning for your child’s college education, the more aggressively you will be able to invest – and consequently, the compounding and rupee cost-averaging benefits will be higher.
Lastly, make sure that you avoid packaged solutions from life insurers that promise to solve the problem of child education planning. These policies usually have very low returns that barely match (let alone outpace) inflation. Work with a qualified advisor and stick with a well-planned portfolio of mutual fund SIPs that are in line with clearly defined goals – and you will get home with room to spare.
This article has been written by Mayank Bhatnagar, Chief Operating Officer, FinEdge
Disclaimer: The views and suggestions mentioned here are those of the respective commentators. The facts and opinions expressed here do not reflect the views of www.financialexpress.com. Please consult your financial advisor before investing.