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Investing for Child Education

During a discussion with my neighbor he mentioned that the fees for a government engineering College is around 4 lakhs, that is like a 70-80 % increase to what I used to pay 12 years back [ I completed my engineering in 50,000]. My neighbor mentioned, that with such a rapid hike, I need to work on the strategy for my child’s education, but not sure where to start. Are you also facing the same dilemma? Then this post is just for you –

Why is there so much talk nowadays, about planning for child education? Have things really changed so much?

 Well, it has and here are some of the stats to support the statement –

According to government data, average private expenditure on secondary education in private schools is as high as Rs 893 per month as compared to only Rs 275 per month in government schools primarily due to difference in high tuition fees in private institutions.

According to the survey, parents spending on a single child’s education has gone up from Rs 35,000 in 2005 to over Rs 94,000 in 2011 on such items and activities as integral to the school curriculum like fees, transport books, uniform, stationery, building fund, educational trips, extra tuition’s and extra-curricular activities.

The survey highlights that the rising cost of education, has become a major cause of worry for parents. Majority of parents spend on average more than Rs 18 lakh-20 lakh in raising a child by the time their teen graduates from high school.

What is an ideal strategy for planning for my child’s education in present times?

 The golden rule is to start early! As investments need time to mature and reap benefits,  and the power of compounding will work wonders in the long run, experts advise to start and plan early that could help you in building a larger corpus and you could fulfill all his desires and dreams.

So, the ideal strategy plan would be –

  1. Work out on the time you estimate for the investment
  2. Check out the present fee structure for the stream you think your child might pursue. Just for example – if you feel saving for a child’s engineering is what is required from a IIT. Then what is the fee structure as of today?
  3. Inflation Rate, if we check out the current inflation it says 5.69 %, but in education sector even school fees [private institutes] claim to raise fees 10-12 % and with a change in slab like primary to middle, the rise goes up to 20-25% . So you need to pick an inflation rate that reflects the education sector numbers.

Once you have these numbers, you could now calculate how much is required for your kid after ‘x’ years and what should be the amount invested every month.

Here is our quick example –

Ria who is two years old, would be ready for her engineering course once she is 17 years.

Stage

Amount Needed

Current Fees for engineering

8,00,000 INR

Present Age

2 years

Time for Investment

15 years

Inflation rate

18 %

Sum Required

95,78,998 INR

Monthly Savings Required

36,186 INR

 

So, once you have the number to aim for, you can plan to invest it. But what investment options would be best to reach the goal?

Which investment options will give optimum returns while planning for my child’s education?

 Investment in Traditional Products

If one has to accumulate an amount of 20 lacs for child education, a standard Money back policy will hardly help as it will accumulate just about half in the given time.

In present time of rising education costs, it is prudent to estimate future education costs and save accordingly to accumulate the required corpus.

Here is our quick example that shows how investing in traditional product could affect your long term goals.

Goal:     Child Education

Time to Goal:     15 years

Target Amount:   20 lacs

 

Investing In Traditional Products

Yearly Premium

Time To Maturity

Maturity Amount

27,000 INR

22 years

1,000,000 INR

 

 

Investing in a mix of Debt and Equity Mutual Funds

SIP[per month]

Corpus Accumulated

Accumulation Time

2,250 INR

2,915,766 INR

22 years

 

Here is the quick list of some of the best investment options, one could opt for –

Sukanya Samriddhi Scheme

If you have a girl child, this government of India initiative is the right choice. You can open the account once your daughter is born and till she completes her 10th birthday.  Minimum of Rs 1,000 and maximum of Rs 1.5 lakh can be invested every year. Deposits can be made for 14 years and maturity period of the account would be 21 years from the date of opening the account. The interest rate is an attractive 9.2 per cent per annum which is subject to change. Like PPF, it is a EEE product and tax exemptions can be claimed under section 80C. Partial withdrawals are also allowed after the child attains 18 years of age.

Protection Against Unseen Circumstances

Covering yourself with a term insurance is another way to protect your child’s future. Make sure to cover Education, Marriage and living expense in the term insurance policy

Equity Mutual Funds

The equity mutual funds are the best investment plan for two reasons-

  • Mode of investment[SIP]
  • Longer time frame [10 + years]

Experts says that if a person starts a SIP of 5000 , assuming a ROI as 11 % for a period of 17 years [ with inflation adjusted] he could gain 589300 INR [ 5.9 lakhs] i.e. the total corpus[amount invested + wealth gained] of

  • [10.2 lakhs + 5.9 Lakhs] = 16.09 lakhs

PPF

A long term and safe option that could earn you a return of 8.5 % annually. The tenure or maturity period of this product i.e. 15 years is so very apt in terms of investment for child’s education or marriage. Another feature of this product is the flexibility in terms of investment.

You can invest as low as Rs 500 every year and also as and when you want. However, there is an investment upper limit of Rs 1.5 lakh for this account. Account(s) can also be opened in the name of your child and it is possible to invest in oneself through one’s own account, which will double the investment limit

Debt Instruments

For the short term needs like tution fees, or hobby class one could choose to invest in Debt funds like – short term funds, income funds, bond funds (with lower maturity), fixed deposit. The returns may be within a range of 6-8 %, but even the risk is lower.

What are the pitfalls of planning your child’s education with Insurance policies?

Children’s plans are insurance-cum-investment plans offered by insurance companies are similar to ULIPs (unit-linked insurance plans). However, the difference between a ULIP and a children’s plan is that the parent starts investing in the children’s plan right from the time the child is born and can withdraw the savings once the child reaches adulthood.

Disadvantages

  • One needs to pay high premium to get a life cover, that you could easily get at a lower rate when you buy a term insurance
  • Even the returns are very low, and if you stop the plan you may actually incur a loss.
  • Lastly investing in child plans with the child as the proposer is the worst decision one could make. The objective of a child insurance plan is to meet college education costs and upon unfortunate grievance of a child, the parents will get the sum insured, which is of no use at all.

 

We hope we have answered your queries on how investing in childs education.If you still have any unanswered questions or need help, feel free to contact us here.

We would be glad to help you with your planning and investment related decisions.

Samiksha Seth

Content Strategist Dilzer Consultants Pvt Ltd

 

 

Sources

 

http://www.moneycontrol.com/news/investing/how-should-you-go-about-planning-for-your-childs-future_934813.html

http://www.financialexpress.com/personal-finance/best-investment-options-plans-schemes-for-children/173755/

http://timesofindia.indiatimes.com/india/Rising-cost-of-education-worries-parents-survey-shows/articleshow/17946981.cms

http://www.moneycontrol.com/master_your_money/stocks_news_consumption.php?cat=insurance&autono=1856781

http://business.rediff.com/report/2009/aug/06/perfin-are-child-insurance-plans-really-good.htm

 

 

 

 

 

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