With every passing day, education in India is becoming more and more expensive. The cost of getting a decent school education in India has skyrocketed. As per data released by the National Sample Survey Office, the average annual expenditure on a private schooling has increased by a whopping 175% in the last 10 years. During the same period, the cost of professional or technical education has increased by 96%.
In view of this, saving for children’s education is of utmost importance. If you are a parent, their children’s needs would tend to come much before their own. Once couples turn parents, their priorities change completely. From living for themselves, the spotlight shifts to providing the best to the child. So, you need to implement a financial strategy with a sound investment portfolio and stick to maintaining it. Educating yourself for being your own financial planner and following the path is crucial for building a sufficient corpus for your child’s education.
Cost of Higher Education in India
Let us consider the rapid increase in cost of higher education in India. The class of 2018 at IIM Ahmedabad has paid Rs.19.5 lakhs for their 2-year course. This is an increase of 353% compared to what it was in 2007. Even if this amount increases at a rate of 20% a year, you will have to pay Rs.70 lakhs in 2025 pay for your child’s tuition at this premier business school.
What is the situation in undergraduate courses? The tuition fees of all IITs have been raised to Rs.2 lakh per year from the earlier Rs. 90,000 per year. This is only the tuition fees. There are a number of other costs which are incurred by a student. If we consider an average increase rate of 10% on the tuition fee itself, the total cost of tuition for an engineering course would be an estimated Rs.15.60 lakhs in 7 years compared to Rs.8 lakhs it is today. And this is just the tuition fees.
|Class of 2007|
(Amount in Lacs)
|Class of 2018|
(Amount in Lacs)
Table 1. Change in tuition fees of premium education institutes in the last decade (Fees amount taken in approximation)
Table 2. Graphical representation of percentage change in tuition fees of premium education institutes in the last decade
Based on the above calculations, if you have a 1-year-old child now, you would need to create a total corpus of Rs 42 lakhs for paying just the tuition fees of an Engineering degree. The tuition fees are even higher at Rs 46 lakhs for funding an MBA education for your child.
Hence, you need to be able to save regularly and invest effectively in order to fund you child’s ongoing education as well as save for his/her higher education. And this is where mutual funds can provide a possible solution.
Child Plan or Mutual Funds – Which is the Better Investment?
Many investors opt for child plan instead of mutual funds when planning their children’s education expenses. There are quite a few reasons why child plans might not be a suitable alternative. For starters, it is best not to mix insurance and investment. The main intention of an insurance policy is to provide protection, not make the funds grow. Naturally, a child plan is not managed with a view to maximize returns and hence, returns of such schemes can never match up to the potential returns offered by a mutual fund. In a child plan, one or both the parents are insured. Hence, a significant portion of the fund is set aside to provide for this insurance amount and the rest is invested in market-linked instruments either equity or debt. This way, in case of the unexpected demise of an insured parent, a sizable sum (sum assured) is paid out in favor of the child, which can be utilized for the child’s education and upbringing. However, the main point to note here is that only a portion of premium amount is being invested to make your money grow, while the rest is diverted towards maintaining insurance coverage of the parents.
Mutual funds offer a better way of investing and making your funds grow faster. All you need to do is purchase a pure term plan for insurance, which is quite cheap and invest the rest into mutual fund. A pure term plan is life insurance coverage that can be availed by paying a nominal annual premium. In case of the untimely death of the insured parent (s), the term plan will pay the sum assured to the next of kin. Simultaneously, the amount invested in the mutual fund will continue to grow at a rate that is much faster than the child plan.
How to Invest in Mutual Funds for Child Education Plan
It is now common knowledge that mutual funds feature various advantages over many traditional investment options. In case you are new to mutual funds or are busy to follow a DIY investment strategy, an experienced fund manager can do the job on your behalf.
The following are a few tips to help you get started. You need to remember that making investments should be a regular habit rather than. Regular investment and starting to save early in life provides you with the benefit of compounding. Of course, if you have a large sum of money sitting idle, it can easily be put to work according to your investment targets and prevailing market conditions. However, one of the best ways to save for your child’s education is to invest through a Systematic Investment Plan (SIP). An SIP works best for all kinds of professionals – salaried or business. Regularly investing small amounts over the long term leads to accumulation of a large corpus which can be very useful at a later date.
Depending upon your income and factoring in your monthly expenses, you should be able to arrive at an amount suitable for investing in SIPs. Since the target corpus tends to be a substantial amount, such an SIP will have to be done for a long-term and not for a short one or three year period. Investing small sums regularly will not burn a hole in your pocket and is bound to help you reach your target corpus in a timely fashion. Moreover, by investing through SIPs, you will not have to time the market since the concept of Rupee Cost Averaging will apply. When you invest through a SIP, you invest on a particular day of each month, irrespective of market conditions. In some cases, you will purchase units at a higher NAV while in other cases units will be available at a lower NAV – ultimately leading to an average NAV. This way, you remain largely unaffected by the volatility of the market. This is feature of SIP investments is known as Rupee Cost Averaging.
Also Read : Best Mutual Fund for Child’s Future
Now let us show you an example of how investing in SIPs can benefit you as a parent. Let us consider that you want to invest Rs 5000 per month. Let us also assume that your child is aged about 5 years at present. If we consider an average return of 12%, by the time your child goes to college 13 years down the line, your total corpus would be worth around Rs.18.61 lakhs. The rate of return however does depend on the type of fund invested in. However, even if the investment is done in the most conservative way, equity mutual fund returns over the long term have tended to range between 10% and 12%.
Obviously if you are able to increase the total annual SIP amount, a larger fund can be accumulated. In the above scenario, if the amount of investment per month is increased by 20% annually, your total accumulated corpus should be worth over Rs. 1 crores by the time the child is ready for college. This is the beauty of compounding. Considering that on average your income will continue to increase, investing more through SIP should be a definite possibility.
Which Mutual Funds to Choose for Your Child Education Plan?
Selecting the ideal mutual fund based on your specific requirements is crucial for generating adequate long term savings for your child’s education. To begin with, instead of investing in just a single fund, you should consider diversifying your investments across at least two or three different funds. On an average a Rs.2000 SIP in each fund is a good place to start. This will ensure that your investment portfolio will benefit from the expertise of different fund managers and various types of funds. After all, when it comes to investing, the importance of diversification can never be ignored.
The core of your investment portfolio should ideally be relatively lower risk diversified equity funds with smaller investments made into various small and mid-cap funds. Diversified equity funds provide key benefits such as lower volatility in the long term. Small and mid-cap funds tend to feature a higher level of volatility, however, the potential rewards on offer are a lot higher than most other equity investments. If you are extremely risk-averse, choosing a few good hybrid funds might be a suitable alternative however your returns will tend to be lower than equity investments. This is mainly because 30 to 40% of a hybrid fund’s investments are done into potentially low return debt instruments. In the last five years, equity funds have given an average return of 12% while hybrid funds have given around 10%. The returns of all equity funds and equity oriented hybrid funds will be tax-free if redeemed after 1 year of investment.
However, you also need to look at the time frame you have to stay invested in order to create your target corpus. If you have more than 10 years in hand before you need the money, go all out and invest in equity funds which have the highest growth potential. However, if you have between 5 and 10 years in hand, it might be more suitable to opt for a balance between equity and hybrid funds. Potentially lowest risk debt funds on the other hand are only suitable in case you are highly risk averse or need the payout immediately.
Start investing early and Enjoy Big Benefits
With regards to investments, starting early is the key to ensuring that your finances are less burdened. For example, if you start saving for your child’s college education (required at approximately 18 years of age) when the child reaches 5 years of age, you will have to invest only Rs 6700 per month to reach the goal of Rs 25 lakhs. However, if you start saving after the child reaches 11 years of age the investment amount per month will go up to Rs 19000 (assuming equity return of 12% p.a.) in both cases. As in every case, understanding how mutual fund investment is useful for beginners can serve as the first step to developing an investment plan that is ideally suited to for your specific needs.
Table 3. The following is a schematic of some key mutual fund investment strategies. It suggests some suitable debt-equity mix as per age of the child.
To sum up, let us list the key points to keep in mind when planning to save for your child’s education:
- The cost of education is going up day by day. Hence, it is extremely important to start saving as soon as possible. This will lessen your financial burden at a later date.
- Never mix insurance and investment. Child plans are insurance policies. Their returns can never match up to that of mutual funds.
- For insurance needs, a term plan is a cheaper alternative to child plan coverage.
- One of the best ways to accumulate a corpus for child’s education over the long term is by investing through SIPs in mutual funds.
- The investment strategy in mutual funds is a combination of – the time you have to build the corpus, your risk appetite, your income level and the target corpus.
- Investing regularly through SIP helps beat market volatility and also build a sense of investment discipline.
By following the above-mentioned strategies, there is a god chance that you will be able to able to save enough to provide the desired level of education at a reputed institute to your child/children.