It is every parent’s dream to give the best education to their child and parents spend 30% of the take home salary for this dream. But high inflation in education is giving parents tough time to achieve this goal. A recent survey done by ASSOCHAM Social Development Foundation –“Rising school expenses irks parents” — highlighted that school expenses of a single child including tuition fees have risen from Rs 55,000 in 2005 to Rs 1,25,000 per annum in 2015, that is an annualised growth of around 9%.
The survey also pointed out that over 70% of the parents spend 30-40% of their take home salary on their children’s education, placing significant burden on their family budget.
The situation in case of higher education is no better. Engineering course from an average college will cost you anywhere around Rs 6-7 lakh for four years while doing MBA will cost around Rs 10 lakh for a decent college. The fees of doing a two year MBA from IIM Ahmedabad have been increased from 13.7 lakh in 2010 to Rs 18.5 lakh in 2015.
So, what do parents do, so that they don’t have to compromise on their child’s education?
Make a plan
Like any other financial goal, you will need to plan for this. You need to estimate how much money you would require and after how much time. Of course, it is tough to estimate an exact amount but you can arrive at a close estimate. Calculate the value as if you have to send your kid to school or college today.
School education may cost you anywhere between Rs 50,000 to Rs 4 lakh a year depending on how much you can afford. You will also have to account in expenses such as stationary, uniform, extracurricular activities etc. Similarly, for higher education do the calculation. Find out what is the cost of doing an MBA today or engineering or becoming a doctor today.
Estimate the future cost
Once, you know the cost of something today, it is easier to calculate the future cost. You can calculate the future cost after adjusting it for inflation. So, assuming you would need Rs 20 lakh for higher education of your child today, after 20 years you would require a sum of Rs 93 lakh, considering a rate of inflation of 9% per annum.
Choose the asset class
There are many options both in debt (fixed deposits and debt mutual fund) and equity (stocks and equity mutual funds) where you can invest. How much you should invest in the two asset classes will depend on the time you have in your hand. Equity is a risky asset class. So, investing in it for a short or medium term may lead you to lose your money. So, longer the time you have in your hand, more equity exposure you can take.
Also, with high rate of inflation in education, having more exposure to equity is better as it will be tough to achieve the targeted amount. Opt for equity diversified mutual funds. You can invest in mutual fund through systematic investment plans (SIPs).
However, don’t go overboard on equity, have some debt exposure as well. This will help you cushion the downfall. Decide an equity and debt allocation based on your risk appetite and invest accordingly. Reduce your equity exposure in the years when you are about to reach your goal. Start redeeming your investment systematically as you are around 4 years away from your goal.
How much to invest
After estimating the cost and how much you will allocate to different asset class, the next step is to calculate how much to invest. For this, you will have to assume a rate of return from the respective asset classes. From equity mutual funds you can assume a rate of return of 12% over long-term, while from a debt instrument the returns will be around 8% to 9%. So, if you want to accumulate Rs 50 lakh, in next 20 years, you will have to make a monthly investment of Rs 69,393, if you invest fully into equity. In case, you invest all your money into debt, you will have to invest Rs 1,09,261 monthly for a period of 20 years.
Sukanya Sumridhi Scheme is also a good option in case you have a girl child
In this year budget government of India announced the scheme under “Beti Bachao Beti Padhao” campaign. You can open an account in the name of your girl child till she attains 10 years of age. Under a special exemption, government has allowed opening of such account for girl’s upto 11 years of age for this year. It is offering an interest rate of 9.25 this year. It will be revised every year by the government. It is eligible for tax saving under section 80C and falls under EEE (exempt, exempt, exempt) tax regime. It means, the investment, the gains as well as the maturity amount will be tax free. The tenure of the scheme is 21 years and the amount will be credited to girl’s account on maturity. Partial withdrawal to the extent of 50% is possible for the purpose of marriage and education of the child at the age of 18 years. You will have to invest for a period of 14 years. The scheme is available in post office and authorized branches of bank. The minimum investment is Rs 1000 and maximum investment is Rs 1.5 lakh a year.