The sharp and continuous rise in education costs, whether in India or abroad, is a clear indicator of the need to financially plan for your child's higher education. Though most parents prioritize saving and investing for their child’s education, they often miss on starting early and end up with inadequate funds.
An efficient financial plan is of little use if not implemented timely, especially due to inflation's ability to reduce the value of accumulated corpus over time.
Why an early start is important?
The famous saying “early bird catches the worm “fits aptly for achieving any financial goal in life. The earlier you begin investing towards the target corpus, the more time your money would have, to grow over time, maximize benefits from the power of compounding, and assist in the timely creation of the desired corpus.
As you keep on delaying the investment, the chances of non-accumulation of the desired corpus continue to rise, since your finances may be highly strained in order to achieve the target corpus within a shorter span of time.
Moreover, with the continuous rise in education costs, it’s vital for parents to begin investing towards their child’s higher education, as early as possible. The below-mentioned example would assist you in understanding the importance and monetary benefits of an early start:
For instance, you need to save Rs 70 lakh for your child's MBA from a University abroad when he/she turns 21. Now, if you start investing when your child is 5 years old, you need to invest a monthly SIP of close to Rs. 12,000, with an expected return of 12% p.a. to sufficiently accumulate the target corpus. However, if you start investing for this when your child is 15, you need to invest through a monthly SIP of a whopping Rs. 66,000.
Evident from the above example, an early start would lower the monthly SIP investment amount required to sufficiently accumulate the target corpus, and also enable you to comfortably focus on other financial goals such as retirement corpus, purchase of a home, child’s marriage etc.
Include inflation cost while estimating the corpus amount
Most parents commit the mistake of taking the existing cost of higher education as the corpus amount, without paying heed to the effect of inflation, resulting in accumulation of insufficient corpus.
Remember that, over time, inflation reduces the purchasing power, implying that the future cost of a course would be higher than the current cost, after factoring in the inflation costs. For instance, a medical degree's cost from a private institute was Rs 60 lakh five years ago, today it costs about Rs.80 lakhs. So if your child is currently 8 years old, 10 years later when he/she is ready to take up their medical degree, you need to have a corpus of close to Rs.1.5 crore to sufficiently fund his/her MBBS degree.
Where to invest?
Instead of investing in traditional investment avenues such as PPF, FDs, NSC etc. which are, more often than not, incapable of providing inflation-beating returns, parents must consider investing in equity mutual funds, preferably through the SIP (Systematic Investment Plan) route. Equities have consistently proven to be the most suitable asset class for long-term investments, and have been outperforming its peers by providing inflation-beating returns.
SIPs ensure disciplined investing and can help you accumulate big corpuses over the long run.
Also, unlike lump sum investments, SIPs relieve the investor from the worry of timing the market well, thanks to the presence of rupee cost averaging concept, which averages out the cost at which investor purchases mutual fund units, over a period of time.
If you are a risk-averse parent, consider investing in balanced mutual funds, instead of entirely investing in equities. Balanced funds invest in a mix of debt and equity funds, and are aimed at balancing the risk-reward ratio for such conservative investors.
But before beginning to invest towards your child’s higher education corpus, make sure you have the following pre-requisites covered:
Make sure you have adequate term insurance which would financially protect your loved ones in case of your untimely demise. The cover should ideally amount to at least 10-15 times your current annual income, and must proportionately increase whenever your income rises in future. Presence of term insurance would also assist your family to continue existing investments and debt payments, thereby preventing them from being financially burdened in case you are not around.
As compared to the offered benefits and huge cover amount, the premium for term insurance plans is relatively very low, making it an even more obvious part of each individual's financial plan.
Secondly, to refrain any financial exigency from hindering your investments towards child’s education corpus, make sure you have an emergency/contingency fund in place. This fund assists an individual in handling financial emergencies such as sudden job loss, severe illness or accident.
Creation, as well as maintenance of this fund, should be one of the priorities before beginning investment towards any goal, whether short or long term. No matter at what stage of life you are, ensure you maintain an emergency fund amounting to least 5-6 times your monthly recurring expenses. Have this fund parked in highly liquid instruments such as high yielding savings accounts, providing up to 7.25% per annum interest rate, along with the highest form of liquidity and convenience In times of urgent needs, due to the presence of ATMs as well as online banking.------------------------------------------------------------------------------------------------------------------------ The writer is CEO and co-founder, Paisabazaar.com. Views expressed are his own