Start planning early for your child's future

Education expenses have shot up through the roof in the last couple of years. Today, a four-year engineering course in a reputed institution costs you nothing less than Rs 10 lakh. This is only the tuition fees for the course. Factor in additional overheads like hostel charges, costs of books and extra activities, incidental expenses. among other expenses.

If all these are added up, your actual expenditure may be Rs lakh for a four- year engineering course. There is a post-graduation education too; which will cost you nothing less than Rs 20 lakh for a two-year course. Incidental expenses will be additional.

If you want to give your child a good education within India, your total investment will be nothing less than Rs 60-70 lakh. All this pertains to a domestic higher education.  If you are looking to educate your child abroad, the actual expenditure will be three times this amount. Remember, all these expenses are at today’s money value. If you are looking at the future, you also need to factor in the annual cost escalations. So, a good education requires a large investment and you need to be prepared for it. You need to plan for it well in advance.

The above calculations are for education. If you add the amount that you need to spend on your child’s marriage befitting your social status, there is a huge gap you need to fill. The time to plan is now. Here is how to go about it!

Earlier you start the better it is

This is the golden rule of planning for your child’s future. The earlier you start, the more your save and the more you save the more your savings earn for you. In financial parlance, this is referred to as the Power of Compounding. The more time you have at your disposal, the more the power of compounding works in your favour.

Consider this example: If your child is 3 years old and if you plan to accumulate Rs 60 lakh by the time your child is 18 years of age, you need to save just Rs 12,000 per month to achieve that dream. The later you start, the higher the monthly savings required. This difference due the power of compounded can become more pronounced as the time prolongs.

If the time factor is in your favour, you should put at least 80% of investment funds in growth assets.

Don’t play it too safe for planning over the long term. Equity and equity funds are best suited to outperform over the long term. If your time frame is 15 years, there is no point in putting 60% of your money into debt. You must look to put at least 85% of your money into equity and equity funds. Even an index fund would give you about 14% returns on an annualised basis over a 15-year period. If you invest in debt you are limiting the potential of your money. All long term investment plans should be predominantly build around equity.

Look at a graded approach to enhance your investments

While we have used the example of static investments across the 15-year time frame to make the example simpler, in reality, things do not work that way. For example, with the passage of time your business grows or you will move up the hierarchy.

The point is that your earnings will grow as time passes by. You need to work out in such a way that you keep allocating higher amounts each successive year to ensure that certain proportion of your income gets transmitted into long term savings.

So if you start off planning for your child’s education with a fixed outlay and enhance the contribution each year then you could end up with a much bigger corpus at the end of 15 years.

Be liberal when it comes to planning your future expenses

Remember, when you plan your future expenses you need to plan for escalations. Escalations could happen for a variety of reasons.

Firstly, there is inflation that leads to higher prices. Secondly, many prestigious degrees were under-priced in India and that could also go up sharply. Don’t just apply the rate of inflation.

For example, the expense of higher education has gone up four-fold in the last 10 years. Remember, when you are planning to send your child abroad to study, you also need to provide for the weakness of the rupee as that too will make a difference to your outflows.

Look at a trade-off between risk and return on your investments

Planning for your child’s future is not just about returns, but also about risks. Here are a few pointers: Equity mutual funds offer a good way to plan your child’s future in the long run. But you must avoid the temptation of sector funds and thematic funds as they can add concentration risk to your portfolio. Prefer the stability of diversified equity funds. Secondly, you need to tweak the equity / debt mix as you go along. When you have 15 years to your child’s education it is okay to remain 85 % in equities. But if you are just two years away, then it is advisable to shift a substantial portion of your portfolio into debt.

Insurance should be a critical part of your child’s future planning

Don’t forget to attach insurance to your child’s future planning. This should be distinct from the normal insurance covers that you have. The insurance policy should be designed in such a way that even in your absence the child’s future plans should not be affected. Planning for your child’s future is not merely the returns but also managing risk. Above all, start early and let time work in your favour.

(The writer is Head - IFA & Investment Products, Motilal Oswal Securities Ltd)