Any good parent wants their kids to be successful, happy and trouble-free. This is particularly true for Indian parents according to a study by HSBC called the Value of Education — foundations for the future. According to the study the most important goal that Indian parents have for their children is that they build successful careers in their adult life. This is the goal for 51% of the Indian parents surveyed outscoring even happy lives (49%). Only two other countries rank higher than India in the desire for children to achieve the highest possible academic qualifications.
However, with rising costs, it has become tougher for parents to pay for quality education. It is indeed a concern for parents if they will be able to afford their child’s higher education. An alarming number of parents (71%) are willing to go into debt to children’s university or college education. Hence, to mitigate such concerns, proper financial planning toward the goal of funding the child’s education is necessary.
What is financial planning?
Simply put, financial planning is the process of evaluating your risk appetite, income levels and accordingly investing in a portfolio to achieve your financial goals. Planning for your child’s education today will help you achieve it seamlessly tomorrow.
For example, An MBA course from any premier college today would cost you about Rs. 25 lakhs. Assuming there is an inflation rate of 10% for education. After 20 years, this would yield to Rs. 1.6 crores approximately.
In another survey conducted by IMRB International called AVIVA Education Insights in 2011 showcases an already well-known fact about India – Parents will go above and beyond for their children and try to only provide the best of everything that money can buy.
30% parents are more concerned about the “expenses” on child’s education than quality, admission, performance or marks. The survey also postulated that that 47% parents remain concerned about the cost of higher education which is slated to grow at a far higher rate owing to rise in inflation and feel that it requires rigorous planning on their end.
How to plan?
First off, evaluate the total cost of education for your child and the amount that you will need to save by a certain time in the future. Post which, you can assess your risk appetite and income levels to determine the various investments which will help you achieve your financial goal.
Here are a few options:
By investing in the right kind of insurance, your child will be assured of a certain amount which will provide an umbrella of protection against the uncertainties of the future. Though traditional life insurance policies offer low yields of 5-6%, these returns are tax-free and assured. You can look into Unit-Linked Insurance Plans designed specifically for the goal of your child’s future education.
Another excellent investment opportunity, Systematic Investment Plans help to save and invest methodically every month which goes a long way to build the corpus you need. As your income increases, the amount you can invest into an equity large- or mid-cap mutual funds will also increase.
The power of compounding will push you towards achieving your financial goal. By investing in equity mutual funds, you will be able to beat the inflation and save for your goal.
For Example, If you invest Rs. 5000 every month for a period of 20 years in an equity scheme with an average of 12%, you will able to build a corpus of almost Rs. 50 lakhs.
Some noteworthy mutual funds in the market for this goal include: Aditya Birla Sunlife Equity Fund, Reliance Top 200 Fund – Retail Plan, Canara Robeco Emerging Equities and ICICI Prudential Balanced Fund.
- Fixed Deposits/Debt Funds
As the time comes near for your child to go study abroad, you can gradually move your investments from equity to debt products such as short-term bank fixed deposits and/or debt funds which will ensure steady returns. But, you can also proportionately invest around 20-25% in debt-funds along with your other investments to balance your investment portfolio.
Though the options available are diverse, it is indeed important to always review your portfolio at least once a year. The review should be based on the performance of the portfolio and whether it’s on track to meet the goal. By monitoring the portfolio, you will be able to increase or decrease your investment accordingly.
Another important tip would be to regularly check on whether the amount required to meet the education goal has changed. This is usually made up of tuition fees and living costs. Any of these can increase based on various factors such as inflation, economy and political factors especially if your child wishes to study abroad.
Finally, remember to re-balance your portfolio which includes selling outperforming assets and investing the proceeds in the ones that are underperforming. By doing so, you will be able to curtail the risk that our investments could face.
Hence, by planning for the future, parents can ensure to save enough for themselves and ensure to provide their children with an array of options for education.
Start early, have defined goals and dedicate savings regularly to create a colourful future for your children.
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