Best ways to invest for your child’s education
- IWB Post
- February 2, 2015
The cost of higher education is already high and rising at 10-12% a year. Children’s education is one of the biggest cash outflows that families must plan for. The question worrying Indian parents is: will they be able to fund their children’s higher education?
Look at the challenges parents face while saving for their child’s education and how they can be overcome.
Be an early bird
One obvious solution is to start saving early. The individual will not only be able to amass a larger sum, but the money will also gain from the power of compounding. A corpus of `1 crore may seem daunting, but it’s possible to save this amount with an SIP of `9,000 for 18 years in an equity fund that gives a 15% return.
A delayed start not only yields a smaller corpus but can also jeopardize other financial goals. If you start investing for your child’s education in your 40s, you are likely to fall short of the required amount. Often, parents dip into their retirement savings to fill the gap, but this can be a risky move.
Choose the right option
Parents must also invest right to get optimum returns. Equity mutual funds, for instance, have delivered average annualized returns of 16.5% in the past 10 years. However, equity investment is not everybody’s cup of tea. This year’s DSP BlackRock Investor Pulse survey shows that though Indians have a high propensity to save and invest, they still seek safety. Almost 52% of the 1,500 respondents said they wanted guaranteed returns from investments.
However, if you have 15-18 years left before your child starts college, equity funds should be the preferred invest ment for you. Over such a long period, the volatility in returns is flattened out.If you have the risk appetite, your allocation to equities can be as high as 75%. The balance 25-30% of the portfolio can be in safer options like the PPF, bank deposits and tax-free bonds.
Play it safe in the short term
If you have a time horizon of less than five years, you will have to rely primarily on fixed income instruments, which are likely to offer a lower rate of return. However, these offer guaranteed returns and safety of capital. In the short term, these factors become very important.
Review the portfolio
Once your portfolio is in place, you need to review it at least once a year. You should also check whether the amount required for meeting the goal has changed.
Education goal has two components: tuition fee and cost of living. Any of these could rise faster than anticipated. You need to find out whether the 12% inflation rate that you have assumed is realistic.
Next, check whether your portfolio is on track to meet the goal. Raise the amount invested in line with your salary increments.
If a fund is lagging, do not sell it immediately. Stop your SIP (Savings Investment Plan) in that fund and start it in another better performing fund. Watch the performance of the laggard for 3-4 quarters and only then decide to sell it. Rebalance your portfolio at the end of each year. Rebalancing essentially entails selling an outperforming asset and investing the proceeds in one that is underperforming. By doing so, you curtail the risk that your portfolio could face due to over-exposure to a particular asset class.
The investment process is never static. Five years before your goal, you should start shifting money out of equities to the safety of debt. Start a systematic transfer plan from your equity fund to a short-term debt fund (average maturity of 1-3 years).
Keep in mind that the date of your child’s admission to college is fixed. You can’t let a downturn in the stock markets jeopardize your child’s college education.
If you have further queries, seek for financial assistance at firstname.lastname@example.org.
The primary source of the article is TOI.