A National Sample Survey Organisation report states that from 2008 to 2014, the annual expenditure on providing a single child with basic education grew from Rs.3,878 to Rs.6,788—a 175% increase. That roughly works out to a rising cost of 29% every year. It means that today, parents in India are spending anywhere from Rs.12,000 to Rs.13,000 annually to get their child educated.
For example, a two-year course at Indian Institute of Management, Ahmedabad costs a whopping Rs.19.5 lakh. This is a 400% increase from what it was in 2007, which is Rs.4,87,500. Those aspiring to go to Indian Institute of Technology, Mumbai are faced with the same predicament. Currently, their parents have to set aside a sum of Rs.2 lakh every year.
Why Investing Early is Important
Regardless of where your child studies, the costs are escalating. This makes it imperative for you to invest as early as you can to ensure that your child has a secure future. Growth in your investments helps you meet costs of higher education expenses without any stress. The longer you delay investments, the tougher it will be for you to comfortably meet your objectives.
Actual Costs Differ from Estimates
An HSBC survey (2015) found that there was a discrepancy when it came to estimated and actual costs of studying abroad. Moreover, the study found that this was highest for Indian parents. The extra cost of an international undergraduate education is 6.3 times more than what parents think they have to pay. "There is a need for parents to realistically consider costs, re-evaluate their savings and plan accordingly so that they can support their children's ambitions," said S. Ramakrishnan, HSBC India's Head of Retail Banking and Wealth Management.
When Should you start Investing?
Starting early gives you the advantage of having to invest less. It also gives you more time to save, the ability to take greater risks, and the benefits of compounding. This doesn’t hold true if you invest right before your child has to apply to universities.
What are the Options Available to Secure your Child’s Future?
Here are time-tested, proven strategies of how you can plan your investments. No matter which option you choose, remember that starting early has several advantages.
1. Equity Mutual Funds:
It is ideal to start investing in equity mutual funds when your child is young and your retirement is at least 15 to 20 years away. This allows you to bear shocks such as crashes and volatility of the stock market. Investing in equities requires technical knowledge and the ability to stay updated, which is not for everyone. So, the more preferable alternative is to opt for equity mutual funds. Experts who know to pick the least risky stocks, while ensuring that your funds appreciate in the long term, manage these. You can create an equity mutual fund portfolio exclusively for your child’s education. This can be done by opening an account for minors and going for Systematic Investment Plans (SIPs) in aggressive instruments like equity mutual funds, when your child is 4 or 5 years old. Then, you can adopt a more conservative stance as both you and your child grow older. Although investing in equity mutual funds comes with associated risks, in the long run they yield annual returns of 12–13%.
2. Public Provident Fund (PPF):
Even after the government reduced interest rates on provident fund accounts, PPF is still preferred by parents. Deposits in PPF encourage discipline, because you cannot withdraw the corpus till the end of the 15-year maturity period. It also lets you enjoy EEE (exempt-exempt-exempt) tax waivers. Since the principal, interest and the total maturity amount are tax-free, you can develop your education corpus. All this while being sure that your money is safe, since the government backs PPFs. But, the official interest rates on PPF have already dropped to 7.9%, so depending entirely on PPFs could lead to a shortage of funds. To avoid this, build your portfolio in such a way that it generates higher returns. Pick a good mix of investments, such as PPFs and Unit Linked Insurance Plans (ULIPS) for your child's future.
3. Debt Mutual Funds:
This is a good option to park your funds in, especially if your child is already preparing to go to college. It is ideal that you put your surplus money in a portfolio that has a higher percentage of exposure to debt funds. Debt mutual fund are financial instruments that invest in fixed income securities like treasury bills, government securities and corporate bonds. Since these instruments pay a fixed rate of interest, debt mutual funds are more stable in comparison to equity mutual funds. Depending on how much time you have to reach your target, you can divide about 60–70% of your money to debt funds.
4. Money-Back Insurance Plans:
These are non-linked plans designed to fulfil the educational needs of your child. They also offer death benefits and a liquidity benefit by providing multiple payouts during the policy tenor. You have the choice of taking the survival benefit (over and above the policy amount) on or after its due date, but during the tenor of the policy. The policy term of a money-backed insurance plan is usually 15 years, while the premium-paying term lasts 10 to 11 years.
The sum that one can opt for under this plan starts from Rs.1 lakh. Some plans also provide rebates if you choose a sum higher than Rs.1 lakh. These plans usually provide regular payouts. The first payout is of 15%, in the fourth year of the policy term. The second and third payouts are of 15% each, given in the eighth and 12th year. The maturity benefit, which is 55% of the sum assured, is given on expiry of the policy. Apart from your child, you will also receive bonuses on maturity of the policy. As per the prevailing tax norms, the benefits received under this plan are tax-free.
5. Recurring and Fixed Deposits.
RD or FD is a traditional investment options known for their safety, these deposits are still good options. There are many financial institutions in India that offer fixed deposit plans for children. But, these aren't too different from regular fixed deposit schemes. Some of them provide extra protection in the form of insurance, while others only offer maturity payout on expiry. You can open an FD for you child even when he/she is one year old. Investing in a fixed deposit also serves as a good financial buffer to protect your child against any uncertainties.
Investing small amounts in recurring deposits can also help you sail smooth despite the rising cost of education. While both deposits work for almost everybody, avoid it if you fall under the 30% tax slab. This is because the high taxation rate can erode the interest by half or more.
6. Investing in Gold:
Who would have thought that gold can ensure a bright educational future for your child? Surprisingly, it can. Not in its physical form, but gold in the form of Exchange-Traded Funds (ETFs). Gold ETFs are mutual fund units where each unit represents 1g of gold. These ETFs can be sold and bought the same way as ordinary mutual funds. The reason why you should not hold gold in physical form is because jewellers sell it at premium, the cost of keeping it in a bank locker is very high, the quality could be compromised, and you could end up selling it for much less than its actual market value.
7. Sukanya Samridhi Yojana (SSY):
This is a deposit scheme for the female children, launched as a part of the government’s Save the Girl Child, Teach the Girl Child (Beti Bachao, Beti Padhao) campaign. As of today, it carries an interest rate 9.1% with tax benefits. A Sukanya Samriddhi Yojana is best opened any time after the birth of a girl, up to the age of 10.An SSY account can be opened in any post office, or at authorised branches of commercial banks. The account remains operative for 21 years from the date of its opening, or till the girl decides to get married. To let you fund her higher education, you can withdraw 50% of the balance when she becomes an adult.
8. Investing in Unit-Linked Insurance Plans (ULIPs):
ULIPs are units of various mutual funds, sometimes equity and sometimes debt, or a combination of both. There are many ULIPs available to secure your child’s future. The USP of children’s ULIPs is that they offer triple brownie points. This is in the form of high insurance coverage, disciplined investments, and participation in the equity market. When the sum is paid to the nominee, the future premium is waived off at the maturity value, ensuring that your children’s future dreams are met. However, ULIPs also have steep surrender charges in the initial years. This is to discourage investors from withdrawing the policy early, with the view of inculcating discipline.
A look at the various options gives you three important guidelines. Firstly, you must start early. Secondly, assess your appetite for risk again, depending on your age and your earning capacity. Lastly, you must track and revise your plan, because the situation is dynamic and ever-changing. A strategy that suits someone else may or may not work for you.
If you think fixed deposits are the right option for you, take a look at FDs offered by Bajaj Finance. They offer an interest rate of 7.85% along with several other benefits such as online investment application and management with a sum that is as low as Rs.25,000.