What is Child Education Planning?
Child education planning is planning the course of your investments in view of the fund requirements for your child for his/ her higher education. Depending upon the corpus required and time period in hand, one can choose to invest a lumpsum amount or for systematic instalments.
Why planning for your child’s education is required?
While on average retail inflation for long term is 4-7%, for education Is whooping 11 to 13% year on year basis. There was a time when parents could afford not to pre plan for the same, and pay out of the pocket’ but those times are long lost.
The two year post graduate fees in IIM – Ahmedabad for 2019-2021 batch is Rs. 23,00,000. For the batch 2007-09, it was Rs. 4,30,000.
In these 12 years, the premier educational institution has hiked to almost 435%!!
If the education inflation continues to grow at this rate, no wonder what amount will be required to fund child’s educational expense.
This scenario is not just for higher educational institutions. The same trend is being observed for undergraduate courses as well.
As a parent, you should be planned for your child’s education, otherwise it will result in huge withdrawal from your pocket, or the only option available will be resorting to education loan.
For your ward’s education, you might have certain inhibitions, like:
1. Will I be able to afford my child’s entire education?
2. What will happen if something happens to me?
3. Do I currently earn and save enough to fund the expenses of my child’s college?
These inhibitions get minimized with proper planning in place.
What role does planning for your child’s education plays?
It prepares you.
Education is one of the basic needs. It is necessary though costly.
Yet most of the parents are not preparing for it, opting for education loan in the end.
Benefit of Starting Early
The earlier you start the better it is. The target corpus can be achieved by investing in smaller amounts, thanks to power of compounding.
With power of compounding, you can earn interest on your investments, which gets multiplies with time. The longer you hold, the greater the amount because interest received is not on purchase value of investments but on total value of your investments.
For ex, if you invested Rs. 100. By month end, you receive 5% interest.
Total value of investment: Rs. 105.
In the next month if you receive 10%, it will be on Rs. 105 and not on Rs. 100. Hence by the end of second month, your total investment will be Rs. 115.5.
- Fund requirement when the child is: 18 years of age
- Duration of higher education: 2 years
- Cost per year as of today: Rs. 10,00,000 per annum
- Existing savings: Nil
- Expected rate of return: 12% (this will vary as per risk profile and time period, for illustration purpose it is assumed to e 12% throughout)
- Expected Inflation Rate: 11.5% (as per historic data)
Following table shows the benefit of starting early:
|Child Education Planning Table|
|Child Age||Amount Required At The Start Of The College||Investment Option|
|SIP Amount Required||Lumpsum Required|
|1||₹ 13,458,080.00||₹ 21,565.00||₹ 1,960,093.00|
|5||₹ 8,707,303.00||₹ 24,333.00||₹ 1,995,489.00|
|10||₹ 5,052,535.00||₹ 32,177.00||₹ 2,040,634.00|
|15||₹ 2,931,804.00||₹ 68,056.00||₹ 2,086,800.00|
Hence, earlier you start saving the better it is.
How to Go about it?
Case 1. Time period in hand: 15 to 18 years approx.
You have a good time period in hand to invest for your child’s education and gain from power of compounding. While investing, do remember to keep the inflation to 10% to 12%.
Further, you can choose to keep the major chunk (80% approx.) in equity, because of the longer time horizon. Else, if equity sounds risky to you, choose aggressive hybrid funds.
Case 2: Time period in hand: 10 to 12 years approx.
Y10 to 12 years is a decent time period. Keep 70% in the starting years in equity and decrease the allocation in equity as you move closer to your goal.
You can also increase the investment amount by certain percentage every year. By topping up, you can choose to bridge the gap between the goal amount required and current scenario.
Case 3: Time period in hand 5 years approx.
Since you have a shorter time period, avoid illiquid investments. Also, keep less than 10% in equity. If you have already invested for your child’s education, gradually start shifting the amount to debt, to avoid the volatility.
If you started in it fresh, go for debt mutual funds and/ or FDs.