How to invest for your child’s education

Every household works in a structured manner towards the goals it wants to achieve and providing best-in-class education to children, ranks high on this list.

With the cost of higher education rising at 10-12% a year; stitching together a plan for your children’s education should be a well-chartered financial move for you.With inflation, education is becoming more expensive each passing year.

Today, a two-year management degree from a premier business school cost around Rs 21 lakh. In 2008, the same course cost Rs 6 lakh. Thus, the cost has grown at an average rate of about 13%. Alternatively, a four-year engineering course which roughly costs Rs 6 lakh now will likely touch 3x i.e. a Rs 24 lakh in the next 10 years.

Heightened competition for admission to quality government-run institutions is forcing several families to turn to more costly private institutions. Hence, before the questions regarding your child’s education start to become a cause of worry; follow some of these simple steps and take matters in your hand.

Short-term and long-term goals

A lot of parents look at a child’s education as a single goal that must be met after
10-15 years when their child is ready to sign up for a graduate or post-graduate degree.

However, a child’s education is not a single goal; rather, a cluster of several small goals. Even before the child is ready to pursue her / his higher degree, parents incur significant expenditure on early education, even before the child is ready for the college.

Let us break this cluster of goals into actionable plans for better understanding.

Within a couple of years, parents must induct their newborn in pre-school / daycare. A quality pre-school can be expensive, and parents must be prepared with ready funds to pay for pre-schooling.

After pre-school, parents must be financially prepared to bear the cost of schooling and private tuitions.

Again, this can be expensive depending on the quality of schooling and also when your child is ready to take the plunge in her / his pursuit of a professional degree. The costs associated with this goal are the largest and parents must be prepared likewise.

An investment portfolio for your child’s education

Parents must consider investing in some of these avenues in proportion so that they have a portfolio that is dedicated to their child’s education.

nMutual funds

Saving money via mutual funds is one of the most convenient ways to build wealth for your child’s education. Mutual funds are particularly useful for saving money towards goals of varying frequencies.

But people often choose to stay away from them, considering the risks – hence to make the best of both worlds, it is recommended to have a blend of equity and debt mutual funds in your portfolio.

nDebt mutual funds

Some debt mutual funds offer better returns than bank deposits. They are also more tax efficient than bank deposits, which makes them a better choice.

So, if parents are looking to save money for two years later when their child is ready for pre-school, they should set aside money in low-risk mutual funds like debt funds.

nEquity mutual funds

For any goals (pursuit of medical / MBA), they should prefer equity funds. They can invest in tax-saving funds to attain the dual objective of securing a tax benefit (under Section 80C) and creating wealth.

nDirect equities

Individuals who have the time and expertise for direct stock market investing, can save money for your child’s education via equity investing.

Equity investing is a long-term solution for wealth creation, which means parents must look at an investment horizon of at least 5 years. So, if there are any short-term education goals, direct equities are not the right avenue.

Parents looking to save for longer-term goals like secondary schooling, private tuitions or higher education, can consider direct stock market investing.

nFixed deposits

Low-risk investors, who cannot stomach the risk of equity investing, can consider investing in fixed deposits (FDs). FDs are ideal for short-term to medium-term goal planning (1-5 years) viz. pre-school, primary schooling.

nPPF

National Savings Certification (NSC) and PPF (Public Provident Fund) are other low-risk options for parents saving for child’s education. Given the lock-in, these investments are ideal for medium to long-term goals (secondary schooling, private tuitions, and higher education).

Parents clearly have plenty of options when it comes to saving for a child’s education. With careful planning, they can build a portfolio with various investments designed to meet goals with different time frames.

(The writer is the head of Personal Wealth Advisory at Edelweiss)