Cost of education in India is increasing almost each year. Parents need to plan their children’s college education well in advance. And the cost of education seems unlikely to decrease in the near future. It would be unwise to rely solely on education loans to access the required funds for your child’s college education. Investing in mutual funds is one of the best ways to grow your wealth over a specific investment period. It would make one of the best ways to get the funds you need for child’s college education.
You should consider several factors before choosing the right plan for your investment.
- Child’s age
- Investor income
- Type of investor
- Investment horizon
- Investor’s ability to bear the risk.
The cost of higher education in India is growing at an alarmingly rate. The cost has doubled (in percentage) over the last 20 years. The cost of a 4-year engineering degree (B.Tech/B.E) from top government institutions is around 9-10 lakh rupees. In some top private institutes, the cost of an engineering education can be as high as Rs 20-25 lakhs. The cost of medical education is similar, if not a little higher.
In the next 10 years, considering a 10% inflation rate, the cost of an engineering or medical education could be easily around Rs 35 – 60 lakhs. An MBA as post graduation from one of the top institutes could cost around Rs 20 lakh. In 10 years from now, you might have to be ready to shell out Rs 60 lakh for your child’s MBA. If they’re planning for studying abroad, it could easily reach around 85 plus lakhs. Considering current scenario to be around 50 lakhs.
Parents need to plan for children’s education
Over the past 20-25 years, as more and more graduates are entering the job market. The competition has become cut-throat. Most Indian parents from the middle or upper class income brackets have very high aspirations for their children’s careers. In order to meet their children’s educational goals, parents must have a plan to save and invest for a sufficiently longer period of time.
Saving for children’s education
One of the most important aspects of financial planning is determining how much money one needs to invest for their children’s goals. You should always take inflation into account when determining your target. Once you know what your goal is, you can figure out how much you would need. Thereby save to meet your goal.
For example, if you have to build a corpus worth Rs 70,00,000 for your child’s graduation and post-graduation in 10 years. You need to save and invest around Rs 43,000 per month for 10 years. Assuming a 6% annual return on investment. Never underestimate the importance of starting financial planning. If you have just 5 years to accumulate the same amount, you need to save more than Rs 1,00,000 per month.
Saving is not enough, invest in the right asset
Traditional savings options for long-term goals have been recurring deposits and traditional savings (endowment) life insurance contracts. The average interest rate of fixed / recurring deposits for the last 10 years is around 6%. Interest of the income is fully taxable at the investor’s income tax rate.
For investors in the highest tax bracket, the average after-tax return on recurring deposits was around 4.5%. For traditional endowment life insurance plans from both public and private insurers, the historical internal rate of return has always been 5-6%. In the accumulation phase of financial planning, the right asset class plays a very crucial role in ensuring the success of your financial goal.
Historical data shows that investing in stocks are the best-performing asset class over the long-term investment horizon. Over the past 10 years, the Nifty 50 TRI, a benchmark index of the 50 largest stocks by market capitalization, has delivered nearly 11% annualized returns steady.
Mutual funds are ideal for education planning
Through mutual funds, you can get exposure to stocks and at the same time diversify the risk associated with investing in individual stocks. You can invest in mutual funds through a Systematic Investment Plan (SIP) wherein you can invest from your regular savings by automatic debit from your bank account on a specified date every month or at any other interval. SIP mutual funds are the best financial planning tools for your long term goals.
If you invest Rs 30,000 every month through SIP, you can accumulate a corpus of Rs 65-70 lakhs in 10 years. Lets assume ROI to be 11-12%. Mutual funds offer a suite of products suitable for different risk appetites and investment needs.
For long-term investment holdings (7 to 10 years or more), equity funds are the ideal vehicle for your financial goals. You can invest in large cap, multi cap, mid cap, small cap etc schemes depending on your risk appetite. For medium-term investment holdings, hybrid funds that invest in both equities are more suitable for education planning.
As you approach your target, you should switch to balanced advantage funds so that your target is not affected by market movements.
Conclusion
Children’s college education is one of the most important financial goals of each and every parent. With the increasing cost of high-quality education, you need to start early and stay disciplined in your financial plan to reach your children’s goals.
Mutual funds are an ideal investment option for children’s education planning as they help you invest in the right mix of assets to ensure the success of your goal. Consult your Kashly relationship manager now to discuss on your children’s education goals and how to go about investing in optimum mutual funds for your children’s education.
