Child Education Planning, Financial planning

Child Education Planning: Plan ahead of time

Introduction

Associated Chambers of Commerce of India (ASSOCHAM) conducted a survey in India which showed that an average parent spends around 65% of his take-home earnings on his child which is more than 50% (an alarming statistics). This should not be surprising as many of us are aware that the cost of education in India is one of the main worries for Indian parents. The education sector is one of the sectors which has a high inflation rate (more than 9%)

It is observed that an average figure spent only on a single child’s school education (the entire tenure) is around 20 lakhs, which include books, stationery, uniform, extra-curricular activities, educational trips, tuition fees, etc. If the college or higher education fees are added then it would not be less than 50-75 lakhs.

child education planning

Children have various aspiring and challenging avenues like B.Tech, MBBS, M.Tech, B.Sc, MBS, BE, etc. which they want to explore. The shortage of funds should not be a hindrance to these aspirations. It is financially difficult for a lot of parents to cope up with higher education. If one compares the cost of education for these disciplines now and the scenario after 10 years, he can observe the sustained increase in the College fees.

Details An approximate fee in Lakhs Likely to be in the future (in lakhs)
B. Tech in IIT’s 9-10 18
B. Tech in other institutes 15-16 30-31
MBBS in Govt. College 2 4
MBBS in Private College 25-27 50-52
MBA in top IIM’s 22-25 43-45
MBA in other institutes 16-18 30-32

The above tabulation is only to provide an idea of overall expenditure on education. It is also important to note that even EMI of any educational loans will be Rs. 13000-Rs.15000- per month.

Assumptions: We have considered an average amount of loan of 5 lakhs for 4 years having an interest rate of 14%.

The bottom line is that every parent should start investing ‘early’ and ‘smartly’. The best method to build up a big corpus for your child’s future is to plan a right investment strategy. Investing in Mutual funds could be one of the smarter options.

Mutual funds for Child education

Mutual funds are one of the wise options for investment when it comes to children education because the funds are diversely invested. One can get to select the portfolio catering to his needs or goals. Investors can choose the categories based on risk factor, returns, investment horizon, etc. In mutual funds, one may go for equity funds or debt funds or a combination of these two types of funds.

Why planning is necessary?

Planning is important and necessary to achieve any goal. It may be like having own house, retiring at right age with full of financial security, having secured future of your near and dear ones, etc. A child’s education is one of these important goals too. Considering the fees and other expenses, one can estimate the cost of higher education at an interval of the child’s life and the amount required to chip in for investment.

The fundamental theory behind any successful investment is ‘Start early-Save more-Keep steady’. There isn’t a ‘right age’ for investments. One must start it as soon as possible. Delaying investments may prove costly. For example, in an Insurance policy, the sooner you grab it, the lesser is the premium. But in Investment, the more the delay, the bigger is the SIP amount outgo every month.

Let us figure it out by calculating in numbers and amount required to invest a lump sum or through Systematic Investment Plan (SIP).

Child’s age (today) Cost of higher education Amount should be invested to fulfill the goal
    Lump sum investment Monthly SIP
2 82,68,799 13,48,820 15,150
5 60,46,074 13,85,604 16,896
7 49,07,130 14,10,683 18,610
10 35,88,051 14,49,154 22,850
13 26,23,552 14,88,674 32,348
15 21,29,334 15,15,618 49,428

Assumptions: He/She will go to college after 18 years of age. Duration of study: 5 years. Cost incurred per annum (as on today): Rs. 2.5 lakhs. Expected rate of return: 12%. Expected inflation rate: 11%. Source: Wealthcare Securities)

Invest right for a bigger corpus (But HOW?)

It is important to invest strategically to earn a bigger corpus. But many times, people get confused or are unaware about how to go about the procedure. Let us follow the following steps to achieve it in right place:

  • One has to consider a few factors or criteria while investing like Age of the investor, his salary or monthly income, the age of the child, other liabilities, other goals, etc.
  • ‘Start early’ is a proven rule of investment.
  • One has to set different goals for different investments. Not all investments are the same and no goals are equal. Therefore, prioritize the goals and make the investments accordingly.
  • The investment having high risk may have higher returns whereas low-risk investments like Debt funds, Bank deposits, etc. may have lower returns. Therefore, depending upon the goal one has to achieve, the right investment tool or method can be harnessed.
  • It is important to approach a qualified, professionally experienced, and wise ‘Financial Advisor and Investment Consultant’. A financial advisor will almost always have a significant more amount of knowledge that you will. Therefore, it is likely that they know better investments products and opportunities.

Educational Loan- A contingency option

Availing educational loans is not a good option. One should choose this option only if circumstances demand so. However, it is always reliable and wise to plan and invest for our child’s education, at the proper time, so that he can reap the fruits of such investments without having a sword of “repayment of the loan” hanging on his head.

Conclusion

Investment is like a sapling. The more we put water and fertilize it, the bigger and healthier tree will come out of it. It is important to “plan” before you invest. It is important to plan and invest for the ‘price’ of education that one needs to pay after a decade or so. Mutual funds are one of the most lucrative, reliable and goal oriented tools of investment.

Mukesh Gupta

Wealthcare has been promoted by Mr. Mukesh Gupta who is a Fellow Chartered Accountant (FCA), Certified Financial Planner (CFP) and Certified Public Financial Planner. He has over 22-years experience in the Wealth management industry. He previously worked with Birla Sunlife Group. He occasionally writes for newspapers and appears on television for matters related to personal finance and Wealth management.
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