How to Become Future-ready to Meet the Growing Education Expenses?
Written on Friday, October 13, 2017
By Viswajeet Parashar - Senior V.P and Group Head - Marketing
Parents wish the best for their kids and, when it comes to education, they wish to impart the best of education to their children. They want to see their children excel in life and get admission to the best of the courses and the best of educational institutes around the world. Also, the aspirations and the desire to experiment new and innovative courses and new educational streams is becoming the need of the hour for the kids of today.
But, it needs money to achieve such aspirations as superior and quality education comes at a cost. However, achieving it may not be as difficult if one has a plan in place.
Find out a roadmap to help you meet your children’s dream. The amount of money that you need to save for your child’s education has risen multi-fold. A generation earlier, most people studied in government institutions, where the tuition fee was low. But, now parents send their children to private, often elite, institutions which are expensive. Many children also go abroad for higher studies, which raises the cost of education even further. 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.
1. PARENT’S HOMEWORK – PUTTING A PLAN IN PLACE
Firstly, decide when do you actually need the funds. Is the requirement for child’s graduation or for higher studies? Once decided, see how many years you are left with to reach the goal. Now, get a fix on your target amount at today’s costs. But, over years due to inflation, this cost of education wouldn’t remain the same. Therefore, you need to inflate the cost. You need to start investing from now to arrive at this inflated amount. The final step is to, work backwards to ascertain how much money you need to put aside every month. Ask your financial planner to help you in arriving at these numbers.
The Maths: For instance, growing at an inflation rate of 6 per cent a year, an engineering course that costs Rs. 4 lakh presently will cost around 10 lakh after 16 years. So, at a growth rate of 15 per cent, you need to put aside around Rs. 1,300 per month to reach that goal. Similarly, a two-year, full-time MBA course at Indian Institute of Management, that costs around Rs. 11.50 lakh for two years would cost around Rs. 40 lakh after 21 years. Assuming equity markets would grow at 15 per cent compounded annualized, you will need to put aside 2,233 per month to reach that amount.
Build CEP: You as a parent 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.
2.KEEPING ONESELF INSURED
Even before you start investing in various investments, make sure you have adequate life insurance cover. Parents should also buy adequate term cover so that even in case of an unfortunate eventuality, their child’s education is not jeopardised. One rule of thumb is that they should buy life cover equal to the inflated cost of education goal. For those who lack financial discipline, child insurance plans also come handy.
Child insurance plan: A child insurance plan is designed to meet the financial needs of your children, be it higher education, marriage or helping them establish a business. What is unique about child insurance plans is the fact that the nominee gets the desired amount twice in case of the insured person’s death. The insurer pays the sum assured to the nominee immediately after the death of the policyholder.
But, even after this payment, the policy doesn’t get terminated, as is the case with other insurance plans. Instead, the insurance company starts putting in the premiums into the policy on behalf of the policyholder. This money keeps growing and is given to the nominee once the policy matures. This way, the policy ensures that funds are available to the child at two life stages. This is possible because of the presence of ‘waiver of premium’ (WOP) feature in child insurance plans. While considering child insurance plan, make sure there is a WOP feature in it.
Child plan variety: You may choose between an endowment plan and a Ulip. An endowment plan is a with-profits or bonus-based plan and, hence, the return from it depends largely on the profits and surplus generated by the insurer. Since the funds are primarily invested in debt assets, the return in them is around 6 per cent per annum. If your risk profile, keeping planning for your kids in mind, does not allow you to take risks through equity exposure, bonus-based endowment plans are best suited for you. However, if you are willing to bear volatility, Ulips, in which the returns are linked to market, would make sense and especially, when the child need is at least ten years away. Choose to stay invested in the equity fund option till you are three years away from the maturity year. Equities perform better over other asset classes over the longterm.
MUTUAL FUNDS AND CEP
The idea is to exploit the potential of equities over the long-term and generate returns higher than other asset classes. The ideal way to build an adequate corpus for your child’s future is to go step by step. Choose to go with the systematic investment plan (SIP) route while investing in equity funds. They not only inculcate the discipline of savings but also keep average holding costs down.
Let’s see, how mutual funds help in creating a CEP. Choose 3-4 consistently performing equity diversified mutual funds schemes. Prefer the large-cap funds, as they invest in well-established blue-chip companies and are less volatile. They give reasonable gains when equity markets rise and are also comparatively less volatile when equity markets fall. Mid-cap funds are prone to high-volatility in medium-term hence, the choice you make needs to be careful. Add mid-cap schemes if you have an aggressive risk profile. You may comfortably avoid any thematic funds, unless you have the appetite for much higher volatility and glued to changing industry scenarios as they need more frequent tracking.
Schools conduct exams to review the student’s performance. Similarly, review performance of your investment portfolio periodically. Look at returns of funds of your portfolio against benchmark and market returns. This could be the time to remove the under-performers. There could be funds which have fallen far in excess of markets. Funds which have fallen less could form a part of your portfolio too.
Get your financial plan reviewed by a financial planner to ensure that you stay on course. A review typically begins with an examination of what was achieved last year: did the investment portfolio yield the targeted rate of return? Did all the mutual funds in the portfolio beat their respective category average returns? If the financial planner finds that a particular fund has been underperforming consistently for three or four quarters, he will put it on his watch list. If the underperformance continues for another couple of quarters, he will suggest removing the fund from your portfolio. Usually, people’s earnings rise from year to year. During the review, the financial planner decides where to channelize the additional savings.
MIND THE TAXATION
Since assets and income are actually being created on behalf of the child, taxes, too, have to be paid on his behalf. And the onus of doing so, according to the Income Tax Act, is on the parent with the higher annual income—the income of a minor child will be clubbed with his. So, what are the investments you can make for your child that will provide tax free income? Equity mutual fund units are a good option. Another is a Public Provident Fund account. Dividends in the first case and interest in the second are tax-free and, therefore, will not add to your tax liability.
When parents say, “We want our kids to have the best of education at all costs”, they really mean it. If cost is not a factor, they should be saving the right way for their kid’s education needs. Creating wealth for child education is a long-term goal and hence, one has to tide over different market conditions to reach the destination. Make sure you have a plan in place and importantly you stick to it! Your children are doing their best in school and now it’s time for you to stick to basics of investing and deliver good result