What’s the most important duty of parents? Providing good education to the children we would say.
Education opens the doors to everything. Moral values, better upbringing and a secured future! But given the day to day rise of education expense, how often as parents do you think about saving as much and as early for your child’s education? That’s an important question that you need to find an answer to! Be it in India or overseas, education exhibits inflation on a year to year basis with the percent rising from 10 to 12 per cent annually.
This directs to:
Are you saving enough for your child’s future?
Where do you start saving for your child’s education?
How do you plan it all?
Where do you begin?
Let the post help you with all the answers!
Start saving early
Now a mammoth task like this needs early investments. The trick is to give your money the power of compounding. For those of you unaware of the term, it’s the process in which an asset’s earnings are reinvested to generate additional earnings over time. To elaborate, suppose you need a corpus of Rs 50 lakhs say 20 years down the line. The task may be daunting and seem impossible but it’s possible to save this amount with an SIP. Putting certain amount of money regularly in equity fund over a good period can help you with the desired return. That’s the power of compounding. And since the rate of education inflation is so high in India, you need compounding to work for you over a longer period. A delayed start will not only yield a smaller corpus but can also jeopardise your child’s education goals.
Prefer long term investment plans
Since your goal itself is of long term so should be the investment. The best option is to invest in Systematic Investment Plans (SIPs). An SIP is a mere tool that helps one to invest regularly in a mutual fund scheme. It imparts financial discipline and helps realise long term goals. Tax-free bonds, Public Provident Fund (PPF), bank deposits or even child plans offered by insurance companies could be an additional saving option. For instance, investing in PPF is a good option since it gives compounded interest (traditional investment option) where it locks the amount invested for 15 years. Bank deposits are tax inefficient, and if you are in the 30 per cent tax bracket, go for income funds. Instead of being taxed every year for the interest, you will be taxed only at the time of withdrawal. You could also invest in diversified equity funds and even buy stocks if you have the time and required skills.
Consider short term options
Now you may not have planned things in advance and you may have a time horizon of less than five years. In that case, 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. Much needed given the situation in hand. PPF is a good investment option but not advisable if you need the money within 5 years. Fixed income investments are fairly safe and advisable.
Review the portfolio
Once your investments are done and you have created a portfolio, make sure to review it at least once a year. You should also check whether the amount required for meeting the goal has changed (given the inflation). Next, check whether your portfolio is on track to meet the goal. While monitoring goals from time to time is important, monitoring your portfolio and see whether it is on track to meet your goal isn’t any less important. That way you can figure out whether you need to increase your investment or put your money to the funds working and performing better. Finally, rebalance your portfolio at the end of each year i.e. sell an outperforming asset and invest the proceeds in one that is underperforming.
A dedicated child’s savings account.
It’s very common these days to put an account for your child when he or she is barely 2-3 years old. Savings accounts although carry relatively low interest rates, but they come with multiple benefits the opportunity to teach children about money and savings as they get older, putting a dedicated sum into savings, etc. This savings account, in the child’s name or the parent’s name can supplement the other, more aggressive investing strategies we mentioned above.
With a well-planned savings and investment approach, you will be able to take care of the inflation in education fees and secure your child’s education and future goals.