How to plan for your child’s education
Providing for children's education is a major goal for most people and a big mistake they make is that they start late.
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One of Avinash Joshi’s major life goals was to provide for his daughter’s higher education. It wasn't long after his financial adviser spoke about the twin risks of inflation and cost increases in educational courses that Joshi, a general manager in marketing, realized the need to plan investments for this certain expense in the future. Thankfully, his daughter was still young and he had enough time to plan and invest.
“We had 7-8 years to plan for my daughter’s higher education and focused investments helped. Being a management graduate myself, I was aware of a ball park figure we needed to work towards. Even for the engineering course expenses we could use...our planned investments. Our focus shifted entirely to helping my daughter clear exams rather than worrying about funds," Joshi said.
The planning done years ago and disciplined alerts prior to the time of withdrawing the funds, is what worked best for Joshi. In his words, “It was a cake walk."
Not everyone is able to plan well in advance. Shanaz Nair, a chartered account, started investing for this goal a bit late, due to other financial obligations. The wake-up call came when her elder daughter wanted to opt for International Baccalaureate for higher secondary studies, which was expensive. She also wanted to go to college in the US. This meant a complete re-look at the existing financial plan.
Nair started planning for her elder daughter when she was in 8th grade. But “we were not clear about the amount at the start but with every annual review, the clarity grew. Now we are able to extrapolate for our younger daughter," Nair says. Having realised the perils of starting late, Nair started planning sooner for the younger one.
There are a few other things to keep in mind. You may not know exactly what your child will do 8-10 years hence. However, you may know whether you would prefer to send her to a public or a private college. You would also know whether you want her to pursue postgraduation or not. And, as Nair did, reviewing the amounts each year is also a fruitful exercise.
In planning for their children’s education, Joshi and Nair took the help of their adviser Tarun Birani, founder and chief executive officer, TBNG Capital Advisors Pvt. Ltd. “Assumptions must be made based on aspirations. For example, is it a foreign or Indian education one is looking for? Today, for example, an overseas postgraduation course can cost around $100,000," Birani said.
Once the base cost is defined, you have to account for inflation and annual cost increases. For example, let’s say your target is a postgraduate course that costs Rs10 lakh today. If you need the money 8 years hence—and the average annual inflation for the period is 6% and the cost of the course increased 10% every other year—you would need to have around Rs20 lakh for the same course. Then there are incidentals like living expenses and extra courses too that need to be considered.
According to Nisreen Mamaji, certified financial planner and founder of Moneyworks Financial Advisors, “Often, clients come to us when there are only say 4-5 years left for the goal. Moreover, they are saddled with inappropriate products marked for children’s education, with high charges, and these ultimately don’t meet the requirement." As a result, other goals need to be revised to achieve adequate funding for children’s education, she added.
Funding higher education is a crucial financial goal, thus, the bias is to have minimum risk when it comes to investment choices. However, while security is important, you also need growth to beat inflation and rising costs.
If you create a portfolio that combines long-term growth schemes like equity and balanced mutual funds, your returns can beat inflation. Remaining invested for a long time, like 7-8 years, reduces volatility in the portfolio making it less risky. On the other hand, debt funds like short-term income plans provide stable returns through the period. If chosen well, they help in delivering returns slightly above inflation.
Birani says, “One has to do a suitability exercise to understand the risk profile of investors—only then the products can be chosen. Systematic investment plans in appropriate funds help in reaching the goals set out." Birani suggests a combination of balanced funds, children’s gift funds, equity funds and even short-term debt funds towards this end.
The choice of products and asset allocation also depend on time remaining for the goal.
Mamaji says, “Usually we use equity diversified funds or balanced funds for this, if there is enough time. If it’s too close, say a 3-year period, and there is low risk appetite from the client, then even debt funds work because returns are still higher than fixed deposits with—more efficient taxation if one remains invested for at least 3 years."
Going for bank loans for this purpose needs to be the last resort, and taken up only if you started late and investments are insufficient. The lesser time you have towards the goal, the costlier it can get.
Starting early and staying the course are two aspects of planning for your child’s higher education, which require adapting your behaviour. Along with that, pick products that are most effective from a risk and return perspective. Lastly, do the maths and research what is a fair value to assign for this goal, before you begin to put aside the money.
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