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Planning Investments for Child Education Plan
It is important that before you start investing you have a roadmap and a goal so that you know what you need to do and at what intervals. Having a goal will also help you ensure that you can evaluate your performance and review it periodically. Two aspects of planning for a child’s future are:
A) Planning for unforeseen eventualities (death of a parent): In the case of such an event there should be a shock absorber in place that will ensure that the child’s education is not disrupted. This can be done by buying a good insurance policy and this must be done at the earliest. The trend has shifted to parents buying a policy in the child’s name to parents taking a risk cover which protects the child’s future. There are a variety of plans to choose from and almost all companies offer these plans so picking a good plan will not be difficult.
B) Building a fund that will be relevant considering the inflation and your child’s need: By this I mean that the amount that you aim to save should take in account the rising cost of education and your child’s aspiration. Imagine if you plan for a course in your neighborhood university and your child wants to go for a super specialized course abroad. Of course each parent will have their financial limitations but while planning keep this is mind. If after a few years of saving you feel that your child aspires for bigger goals than you had initially anticipated; pause review and modify accordingly.
The cost of pursuing a professional course on an average is around 12 lakhs (we are not considering the capitation fees that some course may require) today but obviously a few years down the line it will not be the case so how much do you need then. In the chart below assuming the inflation at an 8% you can see how much the course will cost at various intervals.
To meet the goals of funding the child’s education Vivek decides to evaluate two plans; a) invest an initial amount of Rs. 500000 in a FD at 9%or b) invest Rs. 350000 but choose to invest in a diversified equity mutual fund (assuming a return of 16%). Let us how these two plans fare against the rising cost of education
- The FD option (depicted in maroon line) lags way behind the actual need of funds and in no case meet the requirements keeping in mind the rising cost of education.
- The second option is depicted by the green line where money is invested in a MF. Despite the initial investment being lower it manages to meet the requirements by the time a child turns 18. So though it may seem like a good option but careful analysis suggests otherwise. The reasons are given below:
a) Only one product is chosen which is very risky especially if it is a market related product.
b) Ideally a couple of years before the fund is to be used (around the age of 12-14) one should start transferring the money to safer options so that you are not caught on the downward curve of the market when you need the money.
c) It assumes a big investment initially which might not be possible for everyone. Small continues investments are a more realistic choice
Choosing the Right Investment Option
Obviously there will not be one right way to save for your child’s future; you can plan according to your needs and convenience. A few pointers can help you in planning and picking an investment plan that is in line with your objectives. Below we have tried to evaluate a few options keeping in mind a few basic principles. The size and timing of investment will depend on an individual’s choice. Keep in mind the following:
- Start early so that you can use the power of compounding to the maximum.
- Consistency is important.
- Do not put all eggs in one basket
- Transfer funds gradually to safer options at the right time.
- Review from time to time.
- Whenever possible try and top up on the fund with extra savings
- Don’t ever opt for expensive readymade products like Child ULIPs, certain particular Child mutual fund plans
Plan A: Building Child Education Fund
Varun starts investing Rs. 5500/ month as soon as he is blessed with a child. Let us see how his planning works out. A Rs. 1200000 lakhs course in current times would be Rs. 4800000 after 18 years @ 8% inflation annually
- Class A refers to a mix of products that are high risk and high return like commodities, gold, equity, real estate or ULIPS etc. Varun chooses to invest in SIPs of two different kinds of funds one an Index fund and two a gold fund. Thus he ensures he invests in two absolutely different asset classes.
- Class B of products can be balanced funds, debt funds, bonds etc.
- Class C is bank fixed deposits and infrastructure bonds.
- After 12 yrs Varun shifts to more stable products and continues his monthly investments in similar products.
- At the end of 15 years Vivek plays it absolutely safe and invests only in fixed deposits (total corpus collected so far) and for the monthly thing he chooses a RD.
Plan B: Building an Education Fund
Varsha delays her investment plan by 3 years so she must invest 8000 per month but that alone will not suffice so she decides to continue to invest in equity till the child turns 15 and then shift her investment to fixed income products
Assumptions and conditions are same as in plan A
Though she will manage to meet the requirement but it will involve an additional burden monthly and some added risk towards the end as she completely does with the one phase; invests aggressively for a longer period and the shifts to the fixed income option. This is where an early bird has an edge!
Plan C: Building an Education Fund
Vishal plans to invest Rs. 65000 annually out of his bonus/savings for his child’s education fund. He modifies the plan a little he plans to invest in market related products till the age of 14 (his child) and then 2 years of both B and C. He also starts from the time his child is born
Assumptions and conditions are same as in plan A
Vishal also manages to save more than enough for the child and he has some cushion too. He shortened his safe investment window but 4 years is a good enough time span.
Hopefully the above discussion would have given you some insight into planning for a child’s future. Careful analysis, some research and sticking to the basics can help you in making a best child education plan
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