Providing for your child’s education is on every parent’s wish list. However, education costs, right from pre-primary to university have escalated faster than inflation over the last decade or so. The good news is that most of us manage pre-primary and primary education costs from our salaries and regular income.
When it comes to higher education, however, the situation worsens given that demand has increased and so has the cut off required for good quality state funded institutions. Education in private colleges and universities may even be preferred by many parents, but it comes at considerable higher cost. You can benefit from being proactive in planning this spend beforehand.
Work backwards while planning for the amount required. For a private college education in India, the fee today can be anywhere between Rs 8-15 lakhs for the entire graduation course and a similar amount reaching up to Rs 25 lakhs or so for post-graduation. After accounting for a 12% escalation in annual education cost, it’s an expense of around Rs 14 lakhs on an average and upwards. This means you need a sum upwards of Rs 4.5 lakhs each year for three years to fund higher education.
How can you achieve this financial target? If you have time on your side, start a systematic investment plan or an SIP in an equity mutual fund. This will require you to invest every month regularly in an equity mutual fund, an amount that will accumulate gains over the next few years to help you achieve that target amount.
When you get closer to needing the money, move the corpus to a debt fund for safety of capital. The monthly SIP amount should be such that your equity investment itself grows to achieve the target amount net of taxes, debt is simply for safety.
To reach a goal of Rs 14 lakhs at the end of 5 years, you will need to start a Rs 18,000 monthly SIP in an equity diversified fund.
If you have less than 5 years to fund the education expense, then opt for a 50-50 equity and debt allocation, at the same time begin by investing whatever lump sum you can in equity.
Remember, equity investments need time to mature. In the short term, daily market volatility can bear negatively on returns. Hence, the sooner you start the higher the chances of achieving your expected return. An early start also means lower monthly investment.
The key variable in this strategy is the time you lend to the investment; start early and keep it regular. This way you won’t feel the pinch of escalating education costs.