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22Aug2016
Graduation

How to Plan for Your Child’s Higher Education Based On Their Age

Remember Farhan Qureshi in 3 Idiots? His father had planned out his education and career the day he was born. Though the senior’s Qureshi career choice, i.e. engineering was different than his son’s passion for wildlife photography, it emphasized the importance of planning for the child’s higher education.

Having a child is a rewarding experience. It is a pleasure to watch them growing into confident young teens. But in all this happiness, one shouldn’t ignore the higher education cost which is increasing at a great pace.

Source: The Economic Times
Source: The Economic Times

As per the above image, at least nine of India’s top business schools have either raised or are in the process of increasing the course fee by 7%-30% for management aspirants. It means there will be an increase of Rs 46,000 to Rs 3.2 lakh, depending on the institute.

This fee hike is a wake-up call for parents saving for higher education of their kids. As per the Assocham Survey, in the past seven to eight years, parents’ annual income might have increased by 30% on an average. However, the education cost has increased by over 300% during the same period.

This exponentially rising cost has no dead end. If current trend will continue (which will surely), then making your kid a doctor or an engineer will not be child’s play.

What is the solution?

Every parent wants to give the best education to their child without any financial hurdle. It can only be achieved by choosing right investment options, which will depend on the age of the child.

It means the investment choices and strategy for parents of children in the age group of the 3-5 year will be different than the parents whose children are in the age bracket of 15-16.

Here we are giving the best investment ideas for three age groups:

Go for aggressive asset allocation when there is a long time

Age of the child: 0- 7 years

Time available: 10-17 years

Where to invest:

  • Stocks and equities
  • Balanced and debt funds
  • Fixed income instruments
  • Child ULIP insurance plans

What should parents do?

As time is on your side, equity funds should be the preferred investment option for you. Over a longer period, the volatility in returns is flattened out. Therefore, your allocation to equities can be as high as 70% or 80%.

The remaining investment can be in fixed income instruments, like PPF, bank fixed deposits, monthly income plans from mutual funds, Sukanya Samriddhi (for girl child). You can also opt for child ULIP plans, which invest a portion of the premium in equities and the rest in debts.

High exposure to equities is required to beat the rising education cost. In the last five years, equities have given around 12% annual returns, while balanced funds and monthly income plans have given 10.5% and 8.85% (approx.), respectively.

Choose medium risk instruments when the time horizon is shorter

Age of the child: 8- 12 years

Time available: 5-9 years

Where to invest:

  • Stocks and equities
  • Balanced and hybrid funds
  • Monthly income plans of mutual funds
  • Fixed income instruments
  • Child ULIP insurance plans

What parents should do

Parents should start a recurring deposit that should mature around the same time when the child is ready to go to a college. However, if you fall in the highest tax bracket, i.e., 30%, instead of recurring deposit, start a SIP. It will be more likely to give you equal returns than fixed deposits, but are more tax-efficient.

Also, you can start NSC and open a bank fixed deposit. However, remember, the final year interest in NSC is taxable. Also, if the interest received on fixed deposits exceeds Rs 10,000/annum, the tax is deducted. Here again, child ULIP plans will not only generate good returns, but they will also give you a tax-free maturity amount.

Play safe when the goal is near

Age of the child: 13-16 years

Time available: 1-4 years

Where to invest:

  • Monthly income plans from mutual funds
  • Fixed income instruments like recurring deposits and short-term debt funds to meet short-term needs

What parents should do

For parents of teenaged children, the aim should be more in the capital protection. With barely a few years left, you can’t take a risk with the funds accumulated for your child’s college education.

So, at this stage, your equity should not be more than 20%. Even if you have made an investment in equities, it should also be diverted to debt fund to prevent the market exposure.

A Golden Tip:

Irrespective of the age of your child, we have advised Child ULIPs at every stage. The only way to guard your child’s future against life’s harsh reality is by buying a child ULIP.

Unlike other investment options where a parent needs to be present there to invest for the child, a child insurance plan is the only option which doesn’t depend on the parent being there.

For instance, ICICI Pru SmartKid secures the future of your child even in your absence. In the case of sudden death of the parent, the insurer waives all future premiums and the policy continues to offer coverage to the child.

Also, if you start investing in Child insurance plans now, you can make a premature withdrawal on completion of five years to meet any immediate needs, like coaching fee, music fee, etc.

Further, you can buy the plan online also and enjoy tax benefits under Section 80C of the Income Tax Act. Most importantly, it generates returns which are sufficient to beat the inflation rate.

As it is evident from the following image, when you have sufficient time, you can invest more in equities, but as you reach near to your goal, switch funds from equity to debt to protect it from market volatility.

Time Available Investment in Equity
10-17 years 90%-100%
5-9 years 65%-80%
1-4 years 30%-40%

Remember, your child’s higher education depends on the regular contributions made by you. But what if something untoward happens to you? The entire plan of your child’s future can crash. So it makes sense to buy a child ULIP plan to secure your child’s future completely.

“Being a Parent means loving your children more than you’ve ever loved yourself”

The cost of higher education is increasing in the country. Many parents who started late or pick wrong investment might be tempted to dip into their retirement saving to fill the corpus.

However, this is a mistake, and you should never prioritize your child’s education over retirement. Instead, you should apply for an education loan and make your child a co-borrower. It will inculcate a saving habit in your child after he/she takes up a job.

Further, you can use the child education cost calculator to compute how much you need to save for your child’s education and then plan accordingly.

For a parent, children are their world. They can do anything to give the best future, and when it comes to the education, saving becomes the top priority. As a parent, whatever steps you take today will define your child’s tomorrow. So invest smartly and give a happy future to your child.

 

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