Soaring burden related to child’s education expense is becoming a cause of worry for majority parents in India.
Experts have always advised parents to do advance planning for future educations needs. But in present context this advice is becoming even more important.
In order to ensure that, when the moment comes you are not starving for funds, proper plan must be laid out from today to meet the soaring education expense of children.
The planning that was valid a decade back is now outdated. Presently, parents are taking expert advice to plan effectively for child’s future education needs.
In this blog post, we will discuss what experts are recommending to parents in terms of education planning for children.
For me personally, this study has been like an eye opener. I hope you will like it too…
#1. Make investment your prime focus
Generally, our life is driven by several goals at a time. Each goal has their own priority. Some goals score a higher priority than others.
Who decides which priority is higher and which is lower?
It is we who decide for self that which activity cannot be compromised. The activity which cannot be compromised (at that moment of time), gets a higher priority.
Why I am telling all this story?
This concept of prioritizing ones goals is a very important aspect of financial planning.
More often than not, we give priorities to our goals not based on needs, but on basis of social pressure.
Suppose your child is 5 years old today. After 12 years the child is going to need a fund of Rs.90 lakhs for higher education. This is your first financial goal. Suppose today you have another financial goal of buying a home for self occupation.
Which goal should earn a higher priority?
Logically speaking, child’s higher education is an uncompromising goal. But when it comes to buying a home for self, we give education a second priority.
Why it is like this? This is because, buying a home for self, become more important due to social pressure.
In order to build a corpus of Rs.90 lakhs in 12 years, investing Rs.22,500 per month in a good diversified equity fund should be good.
But if you decide to buy a house for self, investing Rs,22,500 per month for child’s education may not be possible.
This is the reason why, when it comes to managing child’s education expenses, investment focus should never be compromised. No matter if it means deferring other less priority goals.
#2. Identify early, the possible education alternatives for your child
There was a time in India, where every one either wanted their child to become an engineer, doctor or a lawyer. But those days are now the thing of the past.
Today in a globalized India, the possibility to get a decent job is possible even if one is educated in a non-traditional subject.
But this is also a fact that this increased education-options has made it more difficult for parents to pick the right alternative for their children.
Child who is preparing to become an engineer may opt for mass media in times to come.
Child who is preparing for graduation in business administration may opt for a course in Digital Marketing.
It is true that, now the options are many. But this may also confuse the child and the parent.
Along with confusion, comes the challenge of identifying different financial needs of each education stream.
Medical and Engineering are options which are comparative expensive. Other education options needs different level of funding.
In order to plan well for the right amount of corpus development, parents must identify early the possible education alternatives for the child.
I know a person who works in a reputed MNC. He has already done his Maths. He knows that his only child would need Rs.1.0 crore by the time he is 17 years of age.
In order to build this corpus, he has been advised by experts to invest 35% of his funds (allocated for education) into ULIP and balance 65% in equity based mutual fund. This kind of detailed planing is necessary to build corpus of the right size.
#3. Start investing early
The expense related to higher education of children has become very expensive. This is the reason why the corpus requires time to build.
The longer time is available for corpus building, easier will be the investment phase.
It is advisable for parents to start investing for higher education very early in life. Giving the funds more then 15 years to stay invested. Higher investment horizons can substantially reduce the burden on parents.
Parents can use equity based mutual funds to build the required corpus.
Since holding period can be very long in case of child’s higher education (if planned properly), one may also consider direct investing in blue chip stocks.
#4. Do not expose your investment to too-much risk
As the investment objective is higher education for ones child, taking unnecessary risk is not preferable.
So how one can manage the risks?
One of the best way to do this is to allow your investment being exposed to equity for the first 7 years. After lapse of 7 years, the funds must be switched from equity based option to debt based options.
If one does not switch totally to debt plans, then investing in balanced funds can be a good alternative.
A typical course in IIM-Ahmedabad may cost a student close to Rs.20 lakhs as education fee. Compare this fees with what it was 10 years back, the cost of this course has increased at an annual CAGR of close to 15% per annum.
If the same growth rate continues in times to come, the fee which is Rs.20 lakhs today will become Rs.80 lakhs after 10 years.
There is also a statistics which state that, the cost of a typical graduation course in India has increased at rate of 10% per annum in last years.
If parents will not plan well in advance, the cost of education will fly beyond manageable limits.
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