Build an equity-heavy portfolio for your child's higher education goals

This is essential to combat the high inflation in cost of education

In a recent ruling, the Supreme Court upheld an Andhra Pradesh High Court judgement that had quashed the state government’s decision to enhance the tuition fee in medical colleges to Rs 24 lakh a year, seven times the fee fixed earlier.

While this is good news for parents, the fact is that higher education is expensive. An undergraduate degree in medicine from a private college can cost more than Rs 50 lakh. A post graduate degree in management from a premier institute can cost Rs 20-35 lakh. Even undergraduate degrees in law and liberal arts from highly ranked private institutes cost a packet. Given the high costs involved, parents must save and invest diligently for this goal.

Fix a target

Estimating the amount that will be required is difficult when the child is young. Costs vary widely across courses (professional or non-professional), colleges (government or private), and country (India or overseas).

“When the child is very young, parents must get an estimate of how much some of the major courses cost currently and fix a rough target. This estimate can be fine-tuned as the child grows and the goal becomes clearer,” says Deepesh Raghaw, founder, PersonalFinancePlan, a Sebi-registered investment advisor.

Apply an inflation rate to the current fee. “Inflation in education is higher than the consumer price index-based inflation. Apply a 10 per cent rate,” says Renu Maheshwari, a Sebi-registered investment advisor, and co-founder and principal advisor, Finscholarz Wealth Managers.  

Be conservative in your estimates so that you end up with a surplus rather than a shortfall.

Begin early

Financial planners say parents must start saving and investing for this goal early—from the day the child is born. “If you wait until clarity emerges on your child’s education goal, it might be too late to gather an adequate corpus,” says Harshad Chetanwala, co-founder, MyWealthGrowth.com.

Starting early makes the journey stress free. “The power of compounding works in your favour. You can arrive at your goal without taking too much risk in your investment portfolio,” says Maheshwari.

When the child is young, parents may also be shouldering the burden of a home loan EMI. “Begin investing for the education goal with whatever amount you can set aside and try to increase your contribution by 10-15 per cent annually as your income grows,” says Chetanwala.

Build an equity-heavy portfolio

Build an aggressive portfolio for this long-term goal. “Depending on what your risk profile permits, opt for an 80:20 or 70:30 (equity:debt allocation) portfolio initially. Maintain this allocation during the initial years. Reduce the equity allocation by 5-7 percentage points annually as you get closer to the goal,” says Raghaw.

Chetanwala suggests having the bulk of your portfolio in equity mutual funds via the systematic investment plan (SIP) route.

The fixed income component can be built using the Public Provident Fund (PPF) opened in the child’s name (7.1 per cent tax-free return). Those who have a daughter can start a Sukanya Samriddhi Yojana account (7.6 per cent return tax-free).

“On the fixed-income side, go with products that allow your money to compound. For instance, if you invest in fixed deposits (FDs), select the cumulative option,” says Raghaw. Those in the 30 per cent and above tax brackets should prefer debt mutual funds over FDs if the goal is more than three years away (to avail of the indexation benefit on taxation).

If your child intends to study abroad, a part of the corpus must be invested in international funds and gold to combat the rupee’s tendency to depreciate against currencies like the dollar.

Dos and Don’ts

• Buy adequate term insurance so that child’s education goal is not compromised in case of an eventuality
• Don’t build a fixed income-heavy portfolio for education goal, or else you could fall short due to high inflation in the cost of higher education
• Fund whatever percentage of the cost of postgraduate education you can without dipping into your retirement corpus
• Encourage your child to work and save after undergraduate degree, and take an education loan
• Avoid child insurance plans; many of them don’t score highly on returns and cost