7 golden rules to save and invest for your child’s education 30 stades personal finance
The cost of higher education is rising at a fast clip in India thanks to general inflation in the economy and a relative decline in public investment in higher education. In the last five years, government expenditure has grown at an annualised rate of only 5 percent, which is not even enough to cover the underlying inflation.
This has forced universities and colleges to raise tuition fees and other charges, translating into higher out-of-pocket expenses for students and their parents. Besides the numbers of seats at public-funded universities and colleges has not kept pace with the rise in the demand, forcing more and more students to opt for private colleges and universities.
In the last decade, the tuition fee at management and engineering colleges has increased at an annualised rate of 13-14 percent, growing at more than double the pace of general inflation.
At this rate, college expenses are likely to double every six-years and treble in ten years.
For example, the two-year management programme at Indian Institute of Management, Ahmedabad, now costs Rs 23 lakh against Rs 16 lakh five years ago. During the same period, the total fee at Indian Institute of Technology, Bombay (IIT-B), has nearly tripled from around Rs 40,000 per semester to Rs 1.15 lakh now. This works to nearly Rs 10 lakh for a four-year B Tech degree at IIT-B.
These fees are over and above the living and lifestyle expenses that the students may have incurred while studying.
So a parent should plan to have at least Rs 1 crore in 20 years from now to pay fees for a management or engineering education from a top-class institute.
Obviously, forking out such a big amount even if spread over 24 or 48 months from their regular salary or income is beyond the reach of most parents.
One way out of this financial burden is an education loan but that can turn into a debt trap for the student if the job market turns bad at the time of graduation as we have seen in the last few years.
Now creating a corpus of Rs 1 crore per child could look daunting and even impossible but it can be achieved if we use the power of compounding. Here are 7ways you can save and invest for your child's education.
1. Start early. Big-ticket purchases such as a house, a fancy car or foreign travel can be delayed or postponed but education must happen at its appointed time. A delay in college admission can ruin a career. So as a parent you must be ready with the money at the appointed year. This means that you start saving for your child’s education as early as possible. This will help you maximise the gains from compounding and lessen your financial headache at the time of admission 15 or 20 years later.
2. Map future expenses for your child education. Education follows a linear progression for most students, which makes it easy for parents to map the various milestones in their child’s educational trajectory like school pass-out year, likely year of admission in college or university and the pass-out year. Make a matching savings and withdrawal calendar. So, if you expect your child to enter college at the age of 18 then you need savings and investment plans that mature when your child turns 17, leaving you with a one-year headroom.
3. Start a recurring deposit (RD) in a bank or post office. The simplest way to save for a child’s education is to start a five-year RD and then re-invest the amount at maturity in a fixed deposit. At the current interest rates, one needs to save around Rs 20,000 a month to create a corpus of Rs 1 crore after 20 years. You can get higher returns and increase your corpus size by dividing your RD across various high yielding instruments such as corporate deposits. At 8 percent interest rate, a monthly RD of Rs 20,000 would grow to Rs 1.2 crore in 20 years.
4. Take some risks and invest in equity mutual funds. In the last five years, diversified equity mutual funds have delivered annualised returns of around 10.5 percent. If they maintain this performance in future, a monthly systematic investment plan (SIP) of Rs 20,000 would grow to Rs 1.6 crore after 20 years which would please most parents.
But remember that equity markets are very volatile and it could be a case that markets are down in the year you had planned to redeem your investment.
So you should have a systematic withdrawal plan (SWP). As a thumb rule, you should start redeeming your mutual fund units 5 years before your expense date. In other words, if you plan to save for 20 years then start redeeming your MFs units at the beginning of 16th year and move the money in safe assets such as government bonds and banks or post office deposits.
5. Follow the portfolio approach and invest in both FDs and equity. Maximise your returns by following a portfolio approach and start with risky assets such as equity in the beginning and raise allocation towards fixed income instruments with each passing year. For example, start with 80 percent allocation to equity in the first year and reduce it in the increments of 5 percent every year. So, if you plan to invest Rs 20,000 every month, invest Rs 16,000 in equity MF in the first year and the rest in the bank or post office RDs or FDs. Next year, reduce your MF SIP to Rs 15,200 per month and invest Rs 4800 per month in FD or RD. And in the last five-years stay away from equity completely.
6. Buy some gold to hedge against inflation and currency depreciation. Inflation is the biggest risk to savers and investors over the longer term and gold is the best way to hedge against it. The problem is an investment in gold doesn’t give yields like dividend or interest. So, it cannot be your core portfolio. But as a thumb rule, 15-20 percent of your portfolio should be in gold.
7. Use the low-interest environment to invest in physical assets like a house.Investment in a house or commercial property is another vehicle to finance your child’s education 15-20 years down the line. Record low interest rate on home loans right now offers a perfect opportunity for people who can afford the margin money and EMIs to invest in second homes or even a commercial property. Investment in homes comes with the advantage of tax breaks that raises the post-tax returns, unlike bank FDs.
Another advantage of real estate investment is potential rental income from the property that increases in the line with the inflation. If you invest right, the rental income 20 years from now may be sufficient to fund your child’s education and you may not need to sell the property at all.
Once can juice-up the returns from the second home by investing the rental income in RDs or equity mutual funds. If you stay disciplined and invest right, most financial goals will be within reasonable reach. Start planning now.
(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).
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