How to secure your Child’s education
Making the right investment for your child’s higher education isn’t child’s play. Financial advisors can guide you on how to go about choosing the right investment vehicle.
Thanks for the overwhelming response for the previous article on How to Save and Invest for Child’s Higher education. Based on your feedback, in this article, we will focus on how to secure your child’s education and the factors you need to consider while making investments. We shall also look at few case studies to help you understand, how successful parents went about it.
Here’s our 11-step approach to help you begin the investment process and successfully complete it.
1. Identify the top two financial goals for your child: From a parent’s perspective, the top two goals are education and marriage.
2. Today’s goal value: Make an estimate of how much it would cost you today to achieve these two goals. Let’s assume Rs. 10 lakh.
3. Time horizon: The year in which you would need the money. Let’s say 2029.
4. Factoring inflation: In our earlier article, we had underlined that education costs increase by 8% in India.
5. Future cost of goal: Assuming an inflation rate of 8% for the next 10 years, the future cost of the education would be Rs. 21.6 Lakhs (10L × [1.08] ^ 10).
6. Know your risk tolerance: It is important to assess your risk tolerance levels. Are you aggressive (accept erosion in capital between 21% and 30%), moderately aggressive (between 11% and 20%), moderate (between 6% and 10%), moderately conservative (up to 5%) or conservative (no downside risk – full capital protection)?
7. Match investment products: Depending on your risk tolerance, you should look for investment products, based on volatility. Government instruments provide capital protection, but liquidity may be a challenge for products like public provident fund (PPF) or Sukanya Samriddhi Yojana (SSY). Financial advisors (and coaches) can help you to choose the right investment vehicle. Remember, the higher the volatility, the higher the returns. If you are moderately aggressive, you can assume that equity investments will give returns of 10% CAGR (compounded annual growth rate) over a 10-year period. Real estate may be an attractive investment option, but comes with liquidity risk. Bank fixed deposits (FDs) at 8% interest seem good enough, but comes with reinvestment risk. Bank FDs come with a capital protection of 1 lakh per investor.
8. Investment approach — one-time or recurring: Depending upon your income, you should decide which approach suits you. For example, if you are cash rich, all it takes is Rs. 8.3 lakh today (and not 10 lakhs) to meet the education goal of Rs. 21.6 lakh (8.3 × [1.10] ^ 10). But, if you’re a salaried professional, you need a monthly investment of Rs. 10,500 (You can use MS Excel – PMT function to get this number 10,500) to generate the required corpus of 21.6 lakh.
9. Cost of delay or inaction: Around 95% of investors fail in this aspect. They know what they should be doing, but procrastinate. A delayed start of systematic investment plan of Rs. 10,500 by 1 year means that your corpus at the end of 9 years is Rs 18.3 lakh, and not Rs. 21.6 lakh. This is a whopping difference of Rs. 3.3 lakh and not Rs. 1.26 lakh (10,500 × 12).
10. Periodic review: Having started your investment journey, it’s important to review your portfolio at least once a year (not daily, monthly or quarterly). Financial advisors will provide insights on your asset allocation (across debt, equity, and real estate) to meet all your life goals.
11. Tax efficiency: Look at those products which are tax efficient. Look for an advisor who can give you holistic advice including tax aspects. Investing in Fixed / Recurring deposits are not tax efficient.
