How to plan a stable higher education fund for your children?

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Higher education is a holy grail for most Indian parents. Nobody wants to compromise on it. But with primary and secondary education getting expensive, there is little scope for parents to save for higher education. Having said that, parents save whatever they can for the child’s education sometimes keeping a target in mind, sometimes just what is available to be saved. Despite the efforts, the horrors of Covid-19 pandemic forced several kids to depend on crowdfunding to manage their fees for higher education abroad. Some succeeded while some didn’t.

“I think what we’re missing is the fact that we can simply let money grow as it is such a long term goal some times 17 to 18 years where it can beautifully compound. But we stick to insurance and FDs thereby restricting the growth of the portfolio,” Shweta Jain, financial planner and founder at Investography said.

Before setting up an investment portfolio, one must always divide the financial goals into short, mid and long term categories. This helps to choose the right mix of equity or debt funds for significant life goals as per the risk appetite, and protects capital investment as well.

“A separate fund for children’s education is strongly recommended. It is best to start investing early, so that you can build up a sizable and adequate corpus well in time. For long term goals, opt for equity oriented funds. Suggested investment options are diversified equity mutual funds, Child ULIP plans by insurance companies and direct equity investment in the bluechip companies,” said Raj Khosla, founder at MyMoneyMantra.com.

Investment in mutual funds

As soon as you are blessed with a child, you should start investment planning for primary, secondary & higher education. Even if you start small today, you can always surge the investments as your income grows in future. Some of the essential investment options for securing a child’s future include consistent investment via Systematic Investment Plans (SIPs) in a mix of diversified mutual funds.

“Equity, and to be more precise, good quality diversified mutual fund scheme should be prioritised for higher eduction fund. Start an SIP, do lumpsum as and when the child gets gifts or in birthdays and you’ll see a huge difference in the size of the portfolio,” Jain advised.

Particularly for higher education, you must determine the goal on the basis of the current fees and associated expenses for the anticipated course and adding 10%-12% of annual inflation thereon. Also, Khosla highlighted the importance of building separate buckets for education of each child.

“Use a mix of equity and debt mutual funds. Reduce risk and shift from equity to debt funds three years prior to attaining your objectives,” he added.

For example, SIPs of Rs 10,000 for 15 years will yield Rs 66 lakh and Rs 1.5 crore after 20 years at 15% annualised return. Thus, long term mutual investments can be truly fruitful and help you achieve your goals with minimum and consistent monthly contributions. There are some obvious cons to this investment. Intrinsic volatility of market linked investment schemes is a major concern. The returns are not guaranteed and there is no capital protection. Therefore, MF investments should only be considered for long term.

Child insurance and other plans

Traditional insurance plans do not take inflation into consideration, and returns are guaranteed but on the lower side. ULIPs however are market linked insurance products and offer benefits such as higher returns, tax benefits & additional life insurance cover.

“Protect your goal using a term policy after inflating it at, say, 10% as education inflation is higher in india. But beyond that, I don’t believe insurance is the product to be invested in for these goals,” Jain said.

Both PPF and Sukanya Samridhi offer you assured returns, but with a lock-in period of 15 years and 21 years respectively. It can be a potential option for your child’s higher education if you start on time.

Education loans

Prolonged Covid-19 has disrupted the financial health of many households by disrupting their emergency funds and savings. In case of an immediate shortfall in education funding, Khoshla suggests to consider an education loan as it offers a moratorium and tax benefits.

Jain seconds this advise and adds, “You could also supplement your savings with a small loan. Setting expectations with the child is important too, motivate them so that they get scholarships if possible. Remember while it is important to get the best education you can for your child, if it comes at the cost of your independence it may not be worth it. Striking that balance is very important.”

NPS-type fund for education

Similar to the National Pension Scheme (NPS), a low-cost higher education fund can be created in India keeping in mind the limitations of the middleclass.

However, as per Khosla, “The current emphasis on developing adequate skill-sets in India’s booming young population has to be a top priority in national policy-making. Accordingly, an NPS-type fund for children’s education should be instituted as soon as possible.”