Case Studies: Are You Prepared To Fund Your Child's Higher Education?

Written on Thursday, October 5, 2017
By Team Bajaj Capital

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Parents want the best of everything for their kids, especially education. While more opportunities are available to children today in terms of career choices, parents need to be well prepared financially to be able to support them in the achievement of those goals.

 

An undergraduate degree in India can cost anywhere between Rs. 5-50 lakh. A post-graduation degree from a private institution, say in medicine, can set you back by up to Rs. 1 crore. The cost of a foreign undergraduate degree can range anywhere from Rs 72 lakh to Rs 3 crore.

 

As a parent, you need to build a child education portfolio (CEP). Creating a separate CEP helps in two ways - You know exactly how much you are investing towards the child need and secondly, the temptation to break it mid-way is less. Linking one's investments to a specific goal not only helps in disciplined investing but is relaxing too.

 

Read on the solutions offered by our experts to get an idea of how you should be investing for meeting the children’s education expenses.
 
Case study I
 
Mr. Jitendra is 30 years old. His daughter Adaya is 1 years old, and he wants to start investing for her higher education. Considering her age, he has a time-horizon of 18 to 21 years. He has bigger plans, and if fortunately, she turns good in studies, he wishes to facilitate her higher education in the field of management.
 
Solution
 
Mr. Jitendra is not just a proud parent but also a responsible one. He has realized that an early start will make things easier for his daughter. 
 
According to a report published in Economic Times, the course fee of a two-year course in Indian Institute of Management- Ahmedabad for the class of 2018 will be around Rs. 19 Lakh. If we consider the average 10% inflation in the education sector, then in the year 2038, when Adaya will turn 21-22, the cost of the same course will be more than 1 Cr. 
 
When there are 18-21 years to go before the child begins college or higher studies, then the parents have the privilege to opt for an equity-heavy (90-100 percent) portfolio.  To accumulate enough fund for her daughter's management studies in premium colleges, Mr. Jitendra must start a Systematic Investment Plan. If he invests around Rs. 6,500 on MF through SIP, then in 20 years he can accumulate 1 Cr, assuming a 15% rate of return. Instead of investing in 1 scheme, he must pick 3-5 MF schemes.
 
Along with that, he must invest in term insurance. As he is 30 years old, so he must insure his life with a term insurance of around 1 Cr. Having the term insurance is essential, as it ensures that even if something unfortunate happens to him and the goal of 1 Cr couldn't be achieved through SIP, then his daughter will at least get that amount through his term life cover. The plan will cost him around 10-12 k depending on the terms and conditions of the plan he is choosing.
 
Case Study II
 
Mr. Krishna's daughter is in class 9 and she is doing good in his studies. Teachers, as well as her parents, have the confidence that she has the potential to crack medical entrances. Mr. Krishna wants to support her merits in every aspect and thus wants to be financially prepared. He has done a few equity-linked investments and is handy with 80 lakhs but there are still 2 or 3 years left for withdrawing the matured corpus. He doesn't want to lose the accumulated amount and at the same time aims to achieve this goal amount of 1 Cr.
 
Solution 
 
He is within striking distance to his goal now. It’s time to exercise caution and protect the capital. In the next few years, his child would require funds for higher studies, thus increase exposure in the balanced funds. He must begin the de-risking process and shift his 100% funds from equities to debt funds. After all, years of growth can’t be left at the mercy of volatility, anymore. Assuming he gets even if 7%-8% return in his debt funds, then also he will easily be able to meet his target. 
 

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