June 10 , 2013
When it comes to children, every parent would like to give them the best of everything. Children are often asked what they would like to be when they are grown up. Somebody wants to be a doctor, somebody a lawyer, somebody a teacher. As a parent you don't want anything to come on their way, not even finances. But with costs of education sky-rocketing, parents often wonder about their capability to provide adequately for their child's higher education in future. With planning and consistent action this goal can be achieved without it appearing very burdensome.
The cost of education
Providing for education is the most valuable and may be in fact the most expensive gift you can give a child.
The average annual fees for a child in an urban area in India are Rs 25,000 for primary school and Rs 32,000 in secondary school. This figure may be slightly lower in semi-urban and rural areas and government-aided schools.
Unless the child gets admission in a government-aided college, costs of undergraduate courses are very high too. The tuition fee per annum hovers around Rs 18,000 to Rs 25,000 for 11th and 12th standard. These days there are hardly any students studying science and commerce that don't take additional coaching whose fees can be as much as college tuition fees or several times higher. If your child aspires to enter engineering, medical or CA/CS profession, add to all of this another Rs 10,000 as an average fee for the entrance exam coaching.
Higher education in India, especially professional courses, is getting expensive by the day. Tuition fees in the medicine and engineering stream easily shoot above Rs 4,00,000. Add to that hostel accommodation, food and other possible expenses.
Inflation in education is also very high, so over the years, the costs are going to rise substantially. A course which costs Rs 4 lakhs today can cost Rs 10.37 lakhs in 10 years at 10 per cent inflation.
Thus the average parent today spends Rs 4,00,000- Rs 8,00,000 on educating a child up to graduation or post graduation. You are not alone if you think a financial goal like this seems intimidating or out of reach. With careful planning and early saving, you will not find the load cumbersome.
Making a savings plan
Most parents today do not spend for child's education from a fund they've created. They spend ad hoc, as and when need arises, from the means available to them. Trouble arises when they are faced with the need to pay huge lump sum amounts and they are forced to borrow from the bank or relatives. To avoid such circumstances it is advisable to create a fund for each child's education early.
The first step in creating an education saving is to estimate how much you'll require. To reach this number, you should take into consideration the types of course your child may be interested in (if he/she knows already), your time horizon, and not to forget, inflation. The best way to reach your goal is to start when your child is a newborn. If this is at the beginning of your career you may have insufficient funds to make sufficient allocations. But as things get better remember to contribute more. If you start early and invest the maximum you can, the effect of compounding will create a huge corpus over time.
It is possible to plan for education at later stages, too, but the allocation of resources required will be very high. The portions of your investments earmarked for funding education should not be utilized for any other purpose.
If you have a time horizon of at least 5 years think no shorter than equities. Equities are the safest bet to give you returns on a longer horizon as debt instruments like bank fixed deposits may not outdo inflation in the long run. If you can invest a lump sum amount, an amount of Rs 1,00,000 invested for 15 years in one of the best performing funds will give you a sum over Rs 8, 00,000 compounded at the rate of 15% per annum and Rs 15,00,000 at the rate of 20%.
Even better is investing in mutual fund SIPs on a monthly basis, which will give you the benefit of cost-averaging. To make a corpus of Rs 8,00,000 you have to invest just a measly sum of Rs 1200 every month for 15 years, assuming it grows at the rate of 15%
Debt products like PPF are other investment options. Their returns are lower than you would get on equity-oriented products but you can still go for it if you insist on having a pure debt product as well in your portfolio. If you want Rs 3.5 to 4 lakhs 10 years hence, you can easily and safely accumulate this money if you start saving about Rs 25,000-28,000 every year in PPF. But, if you start after five years, you would need to save about Rs 61,000-68,000 per year. And if you have to save for two kids, your investment just doubles! All this may sound daunting but there is no need to panic.
As the time for the need of funds gets closer, you need to give more importance to preservation of capital and move from riskier assets to risk-free/low-risk assets, to protect the growth accumulated over the years.
Forget insurance products for children
Insurance companies offer policies like money back or endowment, which give a defined payout at a defined period. Herein, one keeps paying a premium every year and gets a lump sum amount when the child has grown-up and is ready for college. If the unfortunate happens to the parent, the child gets the sum assured on maturity and the remainders of premiums are waived off. The return from such policies is relatively quite low, barely covering the inflation. It is quite possible that you may end-up with shortfall in case education expenses move higher than the expected inflation levels.
Emotional advertising is very much in vogue to lure to products which say they'll help fund your child's future, especially unit-linked insurance plans (Ulips). Products which have the name 'children's plans' may actually not be necessary or even suitable to fulfill your requirements.
In fact there is no merit in investing in insurance products for child's education purpose. It is not a good idea to club investment goals and protection goals by buying a single product for both. For the purpose of protection, you can purchase a term insurance cover and for investing purpose choose a pure investment like mutual fund, PPF, etc.
Look for other options
It is understandable that not everyone can afford to invest thousands of rupees every month for such a fund but that does not mean educating a child till graduation is unrealistic. Do a research on fees charged by different institutions. If it is post graduate education that is the focus, find out if it will be worthwhile to do a part-time or distance course instead of a regular course so your child can also contribute through his/her earnings. Increasingly students prefer to gain experience of 1-2 years after graduation before heading for courses like MBA, MTech and others.
Find out if your child qualifies for any scholarship. Many educational institutes offer scholarships to deserving and needy students. There are scholarships given to deserving students sponsored by trusts, community funds and others. There are government scholarships to assist students of lower income for studies in professional courses.
Ask friends/relatives who may be willing and able to lend you funds without interest or at a subsidized rate. As a last resort you can borrow loan from the bank for educating your child. Education loans are becoming the norm for many parents with sharp rise in fees. These loans can be repaid once the child starts earning. Interest paid on education loan availed by a parent for a child is tax-exempt.