Financial Planning for a Child's Education
By Akhil Chugh
Date April 8, 2021
For every parent, securing their child’s future is paramount. In order to ensure that their child gets the best education and lifestyle, parents constantly go the extra mile. With rising education expenses, investing for the child’s higher education is as important as saving for one’s own retirement. Education costs are inflating at an above-normal rate, and the returns on your child education fund need to outpace inflation.
Hence, a right financial plan to achieve this goal is very important.
So if you want to plan your children’s education smartly, here are a few financial planning tips from Net Brokers that should help you out:
1. Know the Estimated Future Cost of Education:
The cost of education is increasing at a fast pace. According to rough estimates, on an annual basis the education inflation is about 10-12 percent pa. Even by conservative estimate, if education cost inflation of 6 per cent a year is considered, then a 4-year engineering course that costs Rs 10 lakh at present will cost around Rs 28 lakh after 16 years. Similarly, a 2-year MBA course that costs around Rs 12 lakhs would cost around Rs 42 lakhs after 21 years. In the future, global education brands may come to India and their fees will be very high given their modern infrastructure.
Knowing the required corpus to finance your child’s higher education will help you understand the amount of savings that are required to be invested for child’s higher education. Thus, inculcating the habit of financial discipline in the long run.
2. Start Early, Invest Long:
If you save and invest early, you will have a longer time horizon to meet your goals and build a bigger corpus powered by the magic of compounding. Below illustration will explain how an early start can make a difference to the total corpus:
Child: Akash, Current age – 3 years
Education Goal – Graduation after 15 years
Current cost of graduation – Rs 15 lakhs
Growth in Education cost – 9% pa
Future cost of graduation – Rs 90 lakhs after 15 years
Assuming the annual investment yield of 12% pa over the saving period, the required SIP amounts to achieve the desired corpus of Rs 90 Lakhs in 15 years will vary significantly depending on how early you start your SIPs.
As is evident from the table above, you may have to shell out almost 70% more money if you delay saving for your child graduation by just five years. So, it makes a lot of sense for you to start saving for your child future early. Invest now.
3. Periodically Review & Rebalance your Portfolio:
You should keep an eye on the portfolio from time to time to keep you on track with the target goals. Review the portfolio at least once a year to get an idea whether the things are moving in the right direction. Check for new ways that can help you reach your investment goals.
Investment portfolio for child education needs, when they are at least ten years away, should primarily hinge on equities as they have the potential to generate higher returns and associated equity market volatility also plays out in the long run. However, if the time horizon is less than 5 years, then debt funds are better option as they ensure safety of returns.
The investment process is very dynamic, especially if you are investing for the long term. Net Brokers suggests de-risking the funds earmarked for children education at least three years before the goal timeline by shifting money out of equities to less-volatile debt funds. Start a systematic transfer plan (STP) from your equity fund to a short-term debt fund (average maturity of 1-3 years) to safeguard your child’s money from any downturn in equity market.
4. Top-ups with Rising Income:
Increase the amount of investments on an annual basis. Topping up your standard investments vis SIP Top-ups for financial planning for children with easing income can help you achieve a larger fund without any burden. If you received a bonus or salary increment, you can top up the contribution by adding some extra money each month. Its good idea to invest additional funds received by children on birthdays or gifts from grandparents to the same mutual fund folio.
5. Do not Stop Investing
Continue your Mutual fund SIPs till you meet your financial goal. The more you delay, the more you will delay the prospects of reaching your goals on time. Even if you were to pause your monthly saving for a while, do not redeem your goal-based investment to finance other short-term needs and make sure to replenish it quickly from other sources.
Net Brokers believes that with the help of right financial planning and suitable asset allocation, it is possible to secure your child’s future.
With sound financial planning done with the help of an expert professional guidance, you will be ready with the right amount of money when your child is ready to go to college, and won’t be awed by the high costs of education. We advise you to, begin the process of saving and investing early so that an adequate corpus is created for the fulfilment of your children’s desires and ambitions.
Net Brokers is a well-established and reputed financial planning company that offers objective and tailor-made investment plans to the clients and helps them get the best value for the money they spend.
Download Net Brokers Mutual Funds App to start your child education planning with us.
Happy investing!