Saving is always easier with a goal in mind. Having a goal will help in determining the target amount you are after. A goal can be buying a house or car, going on a vacation or saving for higher studies. Each goal may represent a significant milestone in an individual’s life. Here, let’s see the different ways one can start saving for higher studies.
The cost of education is ever-increasing. It is said that currently, education inflation is higher than household inflation. The increase in college expenses is quite daunting for parents as well as individuals looking to self-fund their studies. However, to systematically attack the problem and be well prepared for the upcoming expenses, one should start investing towards an education goal.
1. Identify Education Expenses
Education expenses are just skyrocketing with each passing year. In India, on average, a 4-year engineering degree costs about INR 15 lakhs and a 5-year medical degree about INR 40 to 50 lakhs. Similarly, an MBA degree from IIMs and equivalent is about INR 30 lakhs. And, for foreign colleges, the expenses will be about five times higher.
Therefore, you must briefly make a suitable college list, pick a likely course, and estimate the fees and living expenses. Doing this will help you estimate how much you’ll require to save for higher studies.
We often tend to ignore the effect of inflation on fees and savings. Thus, while estimating the goal amount, make sure you account for inflation.
2. Identify Different Investment Options
There are various options that are suitable for saving towards an education goal. For instance, parents who are saving for their child’s higher education can opt for Mutual Funds, Sukanya Samriddhi Yojana, or other child education plans offered by financial institutions. These child education plans or investment options are suitable for long-term investing.
On the other hand, if you are saving for yourself – for your higher education, it may be a medium-term goal. The best suitable investment avenue will be mutual funds. Mutual funds are suitable investment options for both long-term and medium-term goals.
However, within the mutual funds’ category, you can pick the type of funds that are suitable for your risk profile. In other words, it means that you can pick high-risk funds if you have a greater tolerance for risk. On the other hand, you can pick moderate-risk or low-risk funds if your risk tolerance level is on the lower side.
Moreover, if you are looking at foreign colleges, investing in funds that give you exposure to that currency can be a good strategy. This way, you’ll be able to address the forex risk.
Therefore, depending on your college, course, target amount, investment horizon and risk tolerance level, you can pick a suitable investment option for your education goal.
3. Start Saving Early
The key to creating a significant corpus for your education goal and not worrying about the rising education costs is to start saving early. When time is on your side, you can create a corpus that will help you fund your goals without any worry. Let’s understand this with an example. Mr Karan starts investing in his child’s higher education with 15 years in hand. At the same time, Mr Deepesh starts saving for his child’s education with seven years in hand. Both aspire to save for a foreign under-graduation degree in the USA.
The following tables summarize the costs associated with different universities and the required monthly investment amount that Mr Karan and Mr Deepesh must save to achieve their respective education goal.
|For Mr Karan||Premium Universities||Standard Universities||Value Universities|
|Current Yearly Cost||$75,000||$65,000||$55,000|
|For Mr Deepesh||Premium Universities||Standard Universities||Value Universities|
|Current Yearly Cost||$75,000||$65,000||$55,000|
Since Mr Deepesh has a shorter tenure, his monthly SIP amount is higher when compared to Mr Karan (higher by almost INR 56,800). Thus, you can see the advantage of starting the investments early. With smaller amounts, you will be able to accumulate the desired corpus to sponsor your education.
4. Be Mindful of Investment Risks
All investments have risks. To generate higher returns, you must be willing to undertake some risk. Mutual fund investments are subject to market risk since they invest in equities. Though mutual funds invest in stocks, they have a diversified investment portfolio that professional fund managers manage.
Since the portfolio is diversified and monitored constantly, the fund has the potential to outperform its benchmark and generate significant returns for the investor. Therefore do not assume that the investments are risk-free and that you can generate higher returns without any risk. Furthermore, as much as possible, try to diversify your investments across different asset classes to manage the risk well in order to generate the corpus for your education goal.
5. Keep Investing – Be Consistent
We all have learnt that consistency leads to success. Be it with our work or with our actions. We need to be consistent to enjoy success. Similarly, when it comes to achieving financial goals, you need to be consistent with your investing habits.
Irregular investments will not help you achieve the set target amount for your goal within the duration. Therefore being consistent and not skipping any of your investment schedules will help you reach your target amount within the desired time.
6. Don’t Panic Looking at Short-Term Market Fluctuations
While investing in the markets, volatility is common. If you have a long-term investment objective, do not worry about short-term fluctuations in the market. Let the markets correct themselves, and you stay put with your investments.
Markets always move on cycles, therefore, do not panic and withdraw your investments in response to short-term market corrections. When you are regularly investing over a period of time, you can average out the market volatility and generate significant returns for your investment goal. Furthermore, as you near your education goal tenure, you can move your high-risk investments to lower-risk investment avenues that will help you counter the market volatility more systematically.
To fund higher studies/ education for yourself or for your child, always take into account the various factors that may have an impact on the costs. Create a well-designed plan and make sure you are investing regularly. Creating a corpus that will help you fund the expenses requires patience and discipline. Furthermore, during your investment tenure, don’t let short-term volatility take over you. Don’t panic, and continue with your investments. This way, you’ll be able to average out the market volatility and generate significant returns.