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Mumbai-based Rachel and Ajit Shenoy have invested in a child growth insurance plan for their daughter, Akaisha, 6. The payouts will happen when Akaisha is 18 and 21 years. This money will be used for her education. She also her own savings account, in which the family regularly deposits all the cash she gets as gifts. They have investments in mutual funds, but these are not specifically earmarked for her education. They also have some gold, which they hope will suffice for her marriage.
Yet, are the Shenoys on the right track? Balakrishnan Venkataramani of Vensiva Financial Solutions says they've already made a mistake that most parents make. "As soon as the child is born, parents buy an endowment policy for 20-25 years. And, they invest in equity mutual funds (MFs) for short-term goals. Ideally, it should be the other way around. For short-term goals, one should use debt products and equities for long-term goals,'' he says.
Typically parents save through fixed deposits (FDs) for the short term or National Savings Certificate or insurance for the long term. However, with rising inflation, investing only through these instruments would make it difficult to meet the goals, says Rashmi Roddam, Director, WealthRays Securities.
Ideally, parents should start saving even before the child is born. This is for any medical emergency that could come in the first two years of the child being born, says Venkataramani.
The main things parents save for are children's education, higher studies and marriage. In the past, parents of children below 18 used to save mostly for annual school fees. Nowadays, they enroll children for extra-curricular activities like music, dance, art and even sports. Coaching classes are another expense.
While saving for education, parents must also budget for study abroad. "Education expenses are not only about fees but also hostel fees, food, transportation costs, etc,'' says Anil Rego, chief executive of Right Horizon. The other major goal for parents is marriage of their children. With the rise in inflation and changing trends, it will help if you have a certain age in mind for the wedding and how much you plan to spend.
Though educational loans are available for postgraduate degrees such as in management, engineering and medical colleges, both in India and abroad, it is important to have a sufficient bank balance in the form of savings as a guarantee for the loan, says Roddam.
HOW TO SAVE
Short term
Expenses in the first two years can be met through liquid funds, since these will be mostly related to health. Also, there could be emergencies, says Venkataramani.
For paying a donation at the time of school admission, when the child is four or five years, you can look at a Monthly Income Plan or a debt fund with some equity exposure. Today, schools in big cities take donations from Rs 50,000 to a few lakhs. Bank FDs are tax-inefficient, but can be used for the short term, as they offer high liquidity and are safe.
Up to the medium term
For paying annual school fees, one could look at investing in recurring deposits. FDs with non-banking finance companies would also be suitable for a tenure of one to three years. They provide higher returns than bank deposits. However, it is necessary to get clarity on the background of the company before investing, says Roddam.
Medium to long-term expenses
For the medium to long term, one should create a portfolio of MFs, shares, pension plans, child endowment plans, term insurance plans, gold. For higher education, if there is a five to 10-year time horizon, balanced funds are a good option. If it is more than 10 years, then regular equity diversified funds are the best option.
"If the goal is very long-term, you can have a higher exposure to equity, which can be gradually lowered as you approach the year of need. If planning for marriage needs, gold is a good option. The mix between debt and equity funds can depend on the risk assessment one has done while planning,'' says Rego.
A Public Provident Fund (PPF) in the child's name is another safe option of investment and you get the benefit of section 80C from your income. A loan is available on PPF after the third year for emergencies (such as educational requirements). PPF funds can be used for the low-risk component of investments towards education and marriage needs.
