By Kumar Gaurav and Pallavi Seth
A doctor couple was taken aback when informed that the cost of an MBBS degree in a reputed private medical college was more than Rs 1 crore. They had always dreamt of seeing their only daughter as a famous doctor who would inherit their legacy. The couple’s combined income was quite enough to cater to the needs of an average middle-class life. Still, a significant portion of their savings was absorbed by their only real estate investment — an apartment —and the remaining surplus was eroded by the impact of tax and inflation. And finally, they had to let go the long-cherished dream of an MBBS degree for their only child.
Well-balanced financial plan
This sad incident will resonate with many of us, emphasising how critical it is to design a well-balanced financial plan to fund the education costs of children in the short-, mid- as well as long-term period.
While one to five years can be categorised as short term, 5-10 years would be mid term and 10 years and above long-term horizon. While designing a financial plan, the first requirement is to buy an adequate term insurance plan that would protect the family in case of the sudden demise of the earning member. Rest of the savings surplus may be allocated under child education, retirement, wealth creation heads and other financial goals.
Mutual funds provide saving and investment opportunities for short-, mid- and long-term goals. Pure debt funds or conservative hybrid funds may be used to maintain a short-term fund for your child to be used as and when needed. These funds generate returns higher than that of a fixed deposit and are also tax efficient, as they acquire the benefit of indexation after three years of investment, thus helping the investor save on taxes.
Aggressive hybrid funds
For mid-term plans, as per the risk appetite of the person, balanced advantage fund or aggressive hybrid fund may be chosen. These funds use a blend of equity and debt in varied proportions and provide decent inflation adjusted returns in the medium to long-term period. These are also tax efficient as after one year of investment they offer long term capital gains tax exemption benefits.
For a time horizon of over 10 years, a well-diversified equity portfolio may be constructed as per the risk appetite of the investor. The portfolio may include large, mid, and small cap mutual funds in varied proportions or a choice of multicap or flexi-cap funds with some sectoral or thematic category of funds as an add-on.
Mutual funds being highly diversified into different businesses as per the strategy of the fund fetch decent risk-adjusted returns. The risk is only of valuation volatility and not of a capital loss. Capital loss is more due to an investor panicking at the first instance of market volatility and exiting from the market in the midst of a down cycle.
Risk-averse investors can look at a host of government schemes such as Sukanya Samriddhi Yojana, Public Provident Fund as well as a few guaranteed saving insurance schemes that will help build a corpus in the long term. These provide tax benefits as well and act as a hedge to the equity portfolio.
Gaurav is founder of Nurturing Wealth while Seth is assistant professor, Amity School of Insurance, Banking and Actuarial Science, Amity University
DESIGNED FOR THE LONG HAUL
* The first requirement is to buy an adequate term insurance plan
* Rest of the savings surplus can be allocated for child education, retirement, wealth creation and other goals
* Risk-averse investors can look at government schemes like Sukanya Samriddhi Yojana, PPF & guaranteed savings insurance