Planning it right: Things to keep in mind for your child’s education goal
MUMBAI: Shanaz Nair, a chartered account, started investing for her children’s education goal a bit late, due to other financial obligations. The wake-up call came when her elder daughter wanted to opt for International Baccalaureate for higher secondary studies, which was expensive. She also wanted to go to college in the US. This meant a complete re-look at the financial plan.
Nair started planning for her elder daughter when she was in 8th grade. But “we were not clear about the amount at the start but with every annual review, the clarity grew. Now we are able to extrapolate for our younger daughter,” Nair says. A few things to keep in mind for your child’s education goals.
MIND THE INFLATION AND COSTS
You may not know exactly what your child will do 8-10 years hence. However, you may know whether you would prefer to send her to a public or a private college. And, as Nair did, reviewing the amounts each year is a fruitful exercise. In planning for their children’s education, Nair took the help of her adviser Tarun Birani, founder and CEO, TBNG Capital Advisors Pvt Ltd. “Assumptions must be made based on aspirations. For example, is it a foreign or Indian education one is looking for? Today, for example, an overseas postgraduation course can cost around $100,000,” Birani said.
You also have to account for inflation and annual cost increases. For example, let’s say your target is a postgraduate course that costs ₹10 lakh today. If you need the money eight years hence—and the average annual inflation for the period is 6% and the cost of the course increased 10% every other year — you would need to have around ₹20 lakh for the same course. Then there are incidentals like living expenses and extra courses too that need to be considered.
CHOOSING THE RIGHT INSTRUMENT
If you create a portfolio that combines long-term growth schemes like equity and balanced mutual funds, your returns can beat inflation. Remaining invested for a long time, like 7-8 years, reduces volatility in the portfolio, making it less risky. On the other hand, debt funds like shortterm income plans provide stable returns through the period.
“Usually we use equity diversified funds or balanced funds for this, if there is enough time. If it’s too close, say a three-year period, and there is low risk appetite from the client, then even debt funds work because returns are still higher than fixed deposits with—more efficient taxation if one remains invested for at least 3 years,” said Nisreen Mamaji, certified financial planner and founder of Moneyworks Financial Advisors.
Going for bank loans for this purpose needs to be the last resort, and taken up only if you started late and investments are insufficient. The lesser time you have towards the goal, the costlier it can get.
Starting early and staying the course are two aspects of planning for your child’s higher education. Along with that, pick products that are most effective from a risk and returns perspective. Also, do your maths and research.