The rising cost of education is a big worry for today’s young  parents. The best option thus is to plan and accumulate an adequate corpus to meet this expense. Here is a step-by-step guide for creating your child’s higher education corpus.

Corpus target

Select two to three career alternatives and figure out their current costs. Assume an annual inflation rate for higher education of at least 10%. Once you have a ballpark figure for the required corpus, use online SIP calculators to know the monthly contributions needed for the target corpus.

Start investing early

Investing early allows you to derive the benefit of the power of compounding. For instance, parents aiming to create a higher education corpus of `50 lakh over a period of 21 years would require a monthly investment of about `4,500, assuming an annualised return of 12%. To create the same corpus within seven years assuming the same rate of return, one would need a monthly investment of  `38,500. Opt for the direct plans while investing through mutual funds.

Asset allocation mix

Equities can be very volatile in the short term while generating higher returns than most asset classes over the long term. On the contrary, most fixed income securities offer higher capital protection and income certainty but yield lower returns over the long term. Thus, the allocation across various asset classes should be based on one’s risk appetite and the time left for the start of your children’s higher education.

Parents having higher risk appetite and an investment horizon of at least 10 years should primarily invest in equity funds. Those with less than five years and low risk appetite should go for fixed income instruments like debt funds and high-yield bank FDs. Those having investment horizons of less than five years but having higher risk appetite can consider higher exposure to balanced hybrids funds or conservative hybrid funds.

Term cover

While most life insurance companies offer child plans combining life insurance with investment, go for a term insurance cover equaling the target education corpus. Term policies provide larger life covers at much lower premiums. Those having existing term policies can purchase additional term insurance covering the target corpus for their ward’s higher education. Similarly, parents should also purchase adequate disability insurance coverage to reduce the financial risk arising from the loss of income due to physical disability.

Review your portfolio

As mutual funds with excellent records can become under-performers, compare the returns generated by your mutual fund schemes over the past one-year with their benchmark indices and peer funds at least once in a year. Redeem existing fund(s) for better performing ones if they constantly underperform over the last four quarters. Rebalance the portfolio in case of any significant change in risk appetite.

The writer is co-founder and CEO, Paisabazaar