Education is of utmost importance in today’s world. It is one of those virtues that will be of more importance in the coming future. However, the exponentially increasing cost of higher education is fretting most of the parents.
What you can do is, efficiently planning for child’s education!
In this article, we give you 10 tips you can follow to secure your child’s future.
Investors must take note that investment strategies will vary according to the age of the child, this article has three sub-sections, each section for the different stage of your child.
At this stage, you have around 10-15 years to plan your investment. Starting early will be advantageous and will be helpful in case of any deviations.
Your ideal asset portfolio should be heavily tilted towards equities, as they are more suitable for long-term investment.
Following are a few points you should remember –
Make sure you allocate your assets smartly. You should mostly tilt towards equity, but you must also have a healthy combination of debt and hybrid funds in your portfolio.
Avoid investing 100% in equity funds, as that might be too risky and you might need to start all over again in case of some unforeseeable circumstances.
Starting early will give you an edge as a small investment outflow will be needed in the starting which will put less burden on your financials. This is very helpful, as the compounding of money takes place.
Example: For a target investment corpus of 25 lakhs, if you start investing from age 3, you need only INR 500/month whereas if invested after 6 years, that is from age 9, you will need to invest INR 9125/month for the required amount.
The multiplier effect is more if you start early and hence, it is advisable to take advantage of this effect.
If you opt for Sukanya Samridhi Scheme (for girls) which is both a tax-free return and an exemption under Sec 80C.
These schemes have a considerably long lock term period of 15 years and 21 years respectively.
As the child grows older, you will have 5-9 years to plan your investment. Risk appetite will reduce and an ideal asset mix is 50% stocks and 50% debt.
Hence, a balanced mix of equity, bonds, and stocks is suggested. During this stage, you will have to take care of schooling as well as other coaching expenses for extracurricular activities.
Following are a few points you should remember.
It’s a good idea to have a SIP plan for your children. A SIP is a mode through which an amount is auto-debited from your account and invested in the mutual fund you have chosen to invest in. Over time, the magic of compounding kicks in.
If you are in a high tax bracket, look into various ELSS schemes to reduce the tax burden.
You should review on a yearly basis the cost of education as well as your investments. This will help you stay on track and also provide investment options for a sudden cash inflow.
The yearly review will also be helpful in recognizing the need for increasing the investment amount to meet the target corpus.
Your child has decided his/her career path. With only a couple of years remaining for college, the target can be easily calculated.
For parents of a teenager, the focus should be on the protection of assets rather than on growth. Hence, it is suggested that 10-15% of the asset be invested in equity and the rest in debt funds.
Following are a few points you should remember.
Well, equity funds provide higher returns, but if your duration of investment is just 2-3 years, it is always suggested that you avoid taking risks and stick with debt funds or if your ideal duration is slightly longer, you can consider hybrid funds as well.
The risk associated with the equity markets is not worth the gain, especially in the short term.
A sudden downturn in equity markets may be harmful and may not recover in due time required.
This is more of a tip for your benefit. Do not be tempted to use the retirement corpus which you have saved for your own future for your child’s education.
While it may look like a good monetary decision in the short term, in the long term, the usage of retirement funds for educational purposes is not a good option.
In the case of a shortfall for the required amount, but less critical goals are on hold and if required go for an education loan rather than breaking your retirement corpus.
In any case, we suggest that it is always better to plan in advance and build a corpus for your child’s education. The loan should be considered the last resort.
In any case, education loan companies such as Credilla, provide education loan facilities for studies in India, as well as abroad.
While they charge a higher rate of interest, repayment of such loans is pretty flexible with a moratorium period of 6-12 months after the completion of education.
Higher education may be rising at a fast rate but forming a proper children’s education plan can fare well for your child’s future.
Whether your child wants to go study in the US or in India, these tips will be helpful in securing their future.
However, it is important to understand that investing involves risk. One must invest according to their risk appetite and investment goals.
Disclaimer: The views expressed in this post are that of the author and not those of Groww.