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Planning for the child’s education is a key part of every parent’s financial planning. While everyone intends to save up for the child’s education, how you invest your savings can be the difference maker between good and bad financial planning. Investing all your savings in fixed deposits or other debt instruments will only help you keep pace with inflation and not build a significant corpus. Worse still, if education inflation outpaces the core inflation as it has in the past few years, you might actually be ‘destroying’ the corpus. On the other hand, the parent who had been saving for their child’s education in an equity-heavy fund just before the onset of the Great Recession might have wondered where they went wrong with the whole ‘equity outperforms other asset classes’ messaging. Another thing that I have seen people ignore is the inflation in education fees making their plans assuming the fees will be the same forever, rather than adjusting with inflation.

If there is one tip everyone needs to keep in mind, it is to start early. The power of compounding works wonders.

Let me illustrate with the example of planning for my child’s undergraduate studies. I have used cost estimates from Harvard’s website for the purpose of this exercise. I will need to build a corpus to fund the 4 years of undergraduate studies. She is currently 3 years old, and I expect her to enroll in the UG program at 18. Assuming inflation at 6% (US inflation at 2% and currency depreciation at ~4.5%), I will need 1.5cr-1.6cr annually from years 18 through 21.

Tips

Start early: If I were to start planning today, I would need to save almost 12 lakhs in a balanced fund annually to be able to meet my desired goal. Had I started when my daughter was born, the annual requirement would have been 7.7 lakhs.

Use a step-up investment plan: The numbers in point 1 might seem daunting for a typical Indian parent, especially for a young parent who might be a recent entrant in the workforce. But we expect salary increases every year, and hopefully, we should be able to save a larger sum every year. If we can budget for a 10% increased savings every year, the numbers in #1 drop to a more manageable 4.8 lakhs if one started saving from day 1.

Have a balanced portfolio mix that meets your goals, and rebalance your portfolio when needed: Equity does outperform many other asset classes but over a longer term. With this in mind, the right portfolio mix for investing your savings every year can be 90:10 equity: debt in the early years. As the period when you need the funds draws closer, one should rebalance the portfolio by selling off the equity corpus and redeploying it into a low-risk debt portfolio. In the example above, the idea will be that part of the equity portfolio is moved to a debt fund starting 15 years onwards. This will protect the corpus from the fluctuations in equity returns closer to drawdowns. One should review the portfolio every year for any rebalancing rather than looking at the returns every day.

Don’t chase hot tips, or exotic products - stick to index funds: Following the latest Telegram / WhatsApp / analyst tip is probably the worst thing one can do when planning for the future. Thinking that one can consistently outperform the market if that is not one’s main job, is equally bad. Rather than trying to find the next big thing, it is better to be boring. Find low-cost index funds and invest in the same. For debt exposure, FDs are fine if you don’t want to invest in debt funds. The reason I will recommend an FD is the simple reason that individuals typically end up taking equity-like risks in debt funds while chasing yields. Speculative investments are better not part of your fund portfolio or at best be a % (low single digits), which will not meaningfully change your total corpus even if it gets wiped out.

There are other sources of funds: One must explore all possible options for lowering the cost of education by way of grants, scholarships or waivers. If your corpus is not sufficient, education loans are definitely an option one should consider. I would recommend education loans even if one has the funds due to tax benefits, and also as a way to instil financial discipline in one’s child.

I only use 2 funds to plan for my daughter’s higher education corpus

Axis Long Term Equity Fund - ELSS fund that allows me to avail the Sec80C benefit while investing for the child’s education. I deploy 1.5lakhs annually in this fund. 

UTI Nifty 50 Index Fund - The primary investment choice for me. You can choose any index fund.

(Author: Mr Ankit Mehra CEO and Co-founder of GyanDhan)

 

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