There is an old saying which says that, parents live out their dreams through their children. For parents, a good career for their child is one of life’s most important aspirations. Good education is an important factor in career success in the modern age. With rising prosperity, more and more parents want to provide the best possible higher education to their children. You should plan for your child’s higher education from a relatively early stage to ensure that your children’s career aspirations are fulfilled.
Why do you need to start education planning when your child is young?
- Cost of higher education in India has sky-rocketed over the years. Education inflation has been 10-12% (annual) over the past 10 years or so. If the current cost of the higher education, you aspire for your child is Rs 20 lakhs, in 10 years the cost will be more than Rs 50 lakhs (assuming 10% inflation). Try this inflation calculator to know more.
- In recent years, more and more students are aspiring for post graduate education, professional education (e.g. engineering, medical, MBA etc.), and specialized courses / programs which provide better career prospects.With rising levels of education, higher education costs have also increased for parents.
- With rising prosperity in our country, many parents want to send their children to a foreign university for graduate or post graduate level education. If you are planning a high quality foreign education for your child, then the cost will be several times higher than that in India.
- Many financial planners recommend that you start saving and investing for your child’s higher education from the time your child starts going to kindergarten or primary school, so that you have 12 – 15 years for your investments to generate sufficient returns for your child’s higher education goals.
How to plan for your children’s education?
- Define your goal: You need to translate the aspiration for your child into an actionable goal, specifically in quantitative terms, factoring in inflation. Once you have a quantifiable goal, you can work on it in an objective way.
- Have a plan: Child Education Plannerwill advise how much you need to save and invest in order to achieve you / your child’s aspiration of higher education.
- Start early: By starting early, you give yourself sufficient time to accumulate the corpus needed for your children’s education. You will benefit from the power of compounding over long investment tenure.
- Saving is not enough, you need to invest: To accumulate a sufficiently large corpus for your children’s education, you need to invest your savings in the right asset class in order get the returns needed to achieve your child education plan goals. You should invest in mutual fund schemes of suitable risk / return profiles. Suggested reading what is asset allocation and why is it important
- SIP for your children’s education: Through mutual fund SIP, you can start investing from your monthly savings when your child is young and leverage the power of compounding over long investment horizons. Suppose your child wants to pursue a higher education course after 15 years which will cost Rs 50 Lakhs -the above target can be achieved by just investing Rs 10,000 through monthly SIP in equity mutual funds (here the return assumption is 12%). You can try this child education planner calculator for planning.
- Have a separate fund for children’s education: Do not invest your savings for children’s education in a general purpose fund, where you are saving / investing for other financial goals also. Have a separate fund (e.g. separate SIP account) for your children’s education, so that you do not comprise their aspirations for other priorities. You should consult with your financial advisor, if you need help in planning for your children’s education.
Invest through mutual funds for your children’s higher education
- Mutual funds are suitable investment options for your children’s higher education. Depending on your risk appetite and investment tenure, you can select diversified equity funds (e.g. flexicap funds, large and midcap funds etc.) or hybrid funds (e.g. hybrid aggressive funds, balanced advantage funds etc.) for your children’s education goals. You should read this how to choose the right mutual funds according to your need
- You can also invest in Children’s Fund if you want a separate fund dedicated for your child’s higher education. You are likely to have an emotional attachment with a fund which is in name of your child, but the same objective can be achieved with other funds too if you remain disciplined in your investments for your children’s higher education.
- You should invest for your child’s higher education through SIP from your regular savings. Through SIPs, you can invest over long investment tenures and benefit from the power of compounding. SIPs also help you take advantage of market volatility through Rupee Cost Averaging.
- Once your child reaches his / her higher education timeline i.e. when your child is starting college, you can use Systematic Withdrawal Plan (SWP) to pay for your children’s tuition fees and other associated expenses like boarding (hostel), food, library, books, broadband, mobile, online courses etc., as applicable. With SWP, you draw a fixed amount every month or any other interval, while the rest of your investment continues to earn returns. SWP in equity oriented funds is also much more tax efficient compared to traditional fixed income investments.
- If you want your child to pursue post graduate or professional degrees e.g. MBA, medical degrees etc., thenyou should continue to invest in mutual funds even after your child starts going to college / university. Remember your child’s education can continue for 5 – 6 years or even longer (e.g. MBBS / MD). Over 5 years plus investment horizons, mutual funds have the potential of generating higher returns compared to traditional fixed income investments.
Consult with a Certified Financial Planner or with your financial advisor if you want to know more about how to plan for your children’s higher education.
Mutual Fund Investments are subject to market risk, read all scheme related documents carefully.