How to Plan for your Child Education Fund

Nowadays, higher education is quite expensive costing anywhere between 20-25 lakhs in India and even more in abroad. The expenses also include the course fees, transportation, stationery, books, and coaching. Hence, it is important to start investing as early as possible for a smooth future for your child. The early investment provides the opportunity to grow and helps to build a goal for your child’s education. It is often said that ‘early investments result in more investment avenues as per your choice’. 

Parents can invest in mutual funds or sometimes directly purchases share from the stock market as these kinds of investment give you higher returns for 15-20 years. Moreover, if you start to save early for your child’s future, it decreases the financial stress at the last moment. So rather than making investments on an emergency basis, it is better to plan the child’s educational requirements. 

Inflation – The Important factor

The fees of children’s graduation and post-graduation have been increasing at a fast rate. For example: In 2015, the fees for IIT were in the range 60,000-90,000 whereas now it is around Rs. 6 lakhs to Rs. 10 lakhs in 2021. 

In such situations, it is not easy to fund your child’s education if you have not saved a good amount of money. So, education inflation is one of the highest types of inflation in the country. 

Plan your Child Education

The following points are required to plan your child’s education fund:

1. Decide your monthly budget

   Determine the target amount that you need to save every month and ensure to meet your monthly goal. 

2. The earlier you start investing, the better it is 

   Planning your child's education fund is a long-term process. The best time to start investing for securing your child’s future is when he/she is born. In 2021, the MBA fees are somewhere around Rs. 18-20 lakhs whereas education costs in abroad at an average of Rs. 40-50 lakhs. These charges might increase in the next 10-15 years because of inflation. So, it is very crucial to understand the importance of early investment so that the benefits can be maximized when your children reach college-age. 

   Let’s understand this with the help of an example: 

   Ashok is 30 years old software engineer. He got married in 2019 and has been blessed with a daughter. Ashok, being well prepared in advance regularly starts saving Rs. 15,000 from his monthly income for his daughter’s higher education. He wants his daughter to pursue engineering and then an MBA thereafter. A reputed college costs Rs. 7 lakhs for an engineering degree today and as per the inflation rate of 8%, the same degree will cost somewhere around Rs. 1 crore in India and Rs 2 Crores in foreign countries. 

   If Ashok invests Rs. 15,000 in a mutual fund with a yearly return of 14% then he would have accumulated approx. Rs. 80 lakhs for his daughter’s education. 

   The same amount is not possible, If Ashok invests in traditional investment options because they only provide a return of 8-9%.  So, it is always better to invest early for a secured and bright future for your child. 

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3. Avoid investments with low returns

   These days, meeting children’s educational requirements is a quite expensive task because of the high-cost inflation in the education sector. Therefore, it is very important to invest in those instruments that provide you the higher returns. 

4. ULIP Plans for child

   Invest through child ULIPs with the premium waiver feature to ensure that the child gets the required amount at the desired age. Equity fund options are also available for child ULIPs for the investment purpose to secure the best benefits over the long term. As a parent, it is always advised to have a sufficient term insurance policy so that any uncertainty or unfortunate event does not disrupt your children's needs. 

5. PPF for Child future

   PPF is a 15-year investment scheme that provides tax-free savings. One may also consider investing in PPF for your child's educational needs by opening a Public Provident Fund (PPF) account in the name of a child. PPF provides the option to partially withdraw money after six years in the time of need. Once the child becomes an adult, contributions will also be made by the child too and then the same account will be extended. 

6. Always keep a long-term investment option

   The financial goal of investors might vary based on their requirements. There are several investment options such as gift fund, and debt funds. If you wish to invest in mutual funds or even directly in equities, you must be invested for longer periods. Children’s gift is also another investment option that comes with a lock-in period. It allows the parents to stay invested for longer times and allows benefits from compounding power. 

7. Recognize your existing investments

   If you have invested in different investment schemes such as PPF, or FDs i.e., Fixed Deposits, then those investments will surely help you in meeting your financial goals. Also, you should get a clear idea about how much more savings are required to achieve a target. 

How to estimate the amount that needs to be saved for Child’s education?

• Determine the time required - Time is one of the most important factors to be considered in the case of investment. According to your child’s current age and the age at which he/she will pursue higher education, evaluate the time horizon that tells you how long time you have to save from now. 

• Understand Education costs- Learn about the education costs on the basis of certain factors such as where you live, what kind of education your child wants, type of college. Furthermore, you should also learn whether your child will study in India or abroad. 

• Determine the influence of inflation – The costs of education are increasing at a very fast pace than the other services. 

• Rate of Return – Always choose a reasonable rate of return on your investments. The chosen rate should always be higher than that of the inflation rate. 

• Calculate the monthly savings – Calculate the exact amount of money using an online calculator that is required to save every month to meet your target. 

Being a parent is difficult because they manage multiple things at once. Parents spend half of their time worrying about their child’s future and the lack of funds that might be a hindrance in achieving their child’s dream. It is always good to start saving for your child’s higher education. This requires planning and a reasonable estimate of education costs.