How Do I Build A Corpus of Rs.50 Lakh for a Child's Education?

Education has become expensive. The demand for higher education has increased with globalization. However, so has inflation in this sector. This demand for higher education and their higher cost has increased challenges for children as well as their families. One way to prepare for such a challenge is by making use of the facility of education loans. It has its side effects wherein the burden of repaying the loan falls on the child. Another way is to slowly and steadily build a corpus of the required amount for your child's higher education.

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Why Is It Necessary to Build a Corpus for a Child?

We have discussed above two ways of financing your child's higher education. The loans are a good way to do it, but the problem with this option is that the child will have to start repaying the loan as soon as he/ she starts working. That puts a lot of mental pressure and stress on the child. 

India skills report (ISR) shows a steady decrease in the number of employable graduates over the last few years. 2021 report says that only about 45.9 percent of graduates are employable. With such reports and low employment rates in our country, there is a lot of pressure on the child to get a job that will repay his/ her loans and ensure some savings for the future along with the ability to pay the current bills.

All these reasons leave us with our second option of building a big corpus for the child's smooth education sails over the years. This is a lengthy process and not completely hassle-free. It requires constant attention and also a lot of diligence to build this corpus. However, it will all be worth it in the end when you reap the benefits.

How to Build A Corpus of Rs 50 Lakh for A Child's Education?

There are steps to follow to be able to build a corpus for your ward's higher education. You first need to analyze the amount you need to build and in how much time you want to build that etc. Rs 50 lakh corpus can be sufficient for your child's financial needs until he/ she starts earning. You need not be overwhelmed by the amount of corpus estimated and the lack of funds now. Instead, devise a smart strategy to build the corpus that is going to support your child's education. Here are a few ways in which you can build a Rs 50 lakh corpus for your child:

  1. Investing in Government-Backed Schemes

    Long-term planning requires a long-term investment option. PPF is one such scheme that also provides you added security with government backing. PPF accounts are also tax-efficient and allow their customers to avail themselves of a tax benefit of about 1.5 lakh per year. 

    Long-term plans like PPF will allow you to build a large corpus by investing a small amount steadily. You are allowed to hold more than one PPF account. This allows you to maintain a separate account for your child's education.

  2. Investing in Specially Designed Child Endowment Plans

    Endowment plans are a good investment option. These specially designed endowment plans are a good option to invest in for your ward's future. They work like regular endowment plans and have the ability to provide full assistance in fulfilling your child's aspirations. The child endowment plans also provide financial support in the event of the sudden death of the parent.

    What you need to be mindful of while selecting an endowment plan is the assured amount. This amount needs to have substantial value as this is the amount your child will get after your death. One way to ensure that this money is utilized only for your child's education is by making additional investments in the form of term insurance, etc.

  3. Investing in Mutual Funds

    Mutual funds gained popularity in the form of long-term plans. Since they allow you to invest for a minimum of 15 to 20 years at a stretch, you can easily save and build an Rs.50 lakh corpus over the policy tenure. 

    There are types of mutual funds you can invest in, like debt or equity mutual funds. They help you battle inflation and hence allow better returns. You can also reinvest your maturity corpus in equity schemes. However, keep in mind the tax benefits of all types of mutual funds. For example, equity schemes provide attractive returns, but they also attract tax of 10% of your gains are above Rs 1 lakh per year.

    You can also choose to invest in direct mutual funds. With their lower expense ratio (they have a 1% lower expense ratio than other regular plans), direct plans do not incur any distribution expenses allowing them to generate attractive returns. The expense ratio is the proportion of the fund utilized for operating costs, etc.

    With the help of mutual funds, you can generate a handsome sum while keeping risk in control.

  4. Include Corpus in Your Term Insurance

    To ensure that your child attains higher education, you must not have only one investment option. Let's say your child finds him/herself in a quandary after your sudden death. You should have a plan in action for such a scenario. Term plans provide life cover for a longer duration at optimum premiums. Make sure that the sum insured is equivalent to the target corpus of your ward's education. Buying a term policy will ensure that there is no halt to regular investment and no hindrance in the way of your child's higher education.

In Conclusion

Building a corpus for your child's education is not a linear process. You may be required to reanalyze and revisit your goals. You may even be required to adjust your strategy and change your ways to handle your finances well. Be flexible and be creative in your investments. At the end of all this fuss and hustle, you will get the reward.

FAQ's

  • How do you calculate the future cost of education?

    The future cost of education depends on several factors. The rising inflation in the education sector is one of the key factors that affect the education cost. 
    You can calculate the future cost of a higher education course of your choice using the following formula:
    Future value = present value (expected returns + rate of interest) *N 
    N here is the duration of the investment.
  • What are the types of mutual funds?

    There are three types of mutual funds naming equity, debt, or a mix of both. Equity is also known as growth schemes and is normally considered for long-term investment. Debt mutual funds are also known as fixed income mutual funds. These are beneficial as short-term investment options.
  • What are the benefits of an educational plan?

    The most important benefit of having an educational plan for your child is that it guarantees your child's education. It makes sure your child gets what he/ she wants, goes to the school of his/her choice. The education plan will support your child's educational aspirations by supporting his/ her fees. 
  •  How do you achieve your corpus?

    If your target corpus is high and achieving it seems like a steep rise up the hill, you should consider increasing your SIP (systematic investment plan). You should consider increasing your SIP by a few thousand every years to reach your goal comfortably.
  • Are mutual funds taxed?

    Yes, generally, the policyholder is required to pay taxes on his/ her mutual fund earning. If you profit from the sale or exchange of mutual fund shares, you will be subject to capital gains tax. Taxes are also applicable if your mutual fund pays dividends. 
    If you want to avoid paying taxes on mutual funds, you can use the harvesting method. This method is about reaping the harvests in time to avoid taxes. In this method, you will be required to book a portion of your gains and reinvest it.
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