 | « Back to article | Print this article |
Planning your child's future? Are you on the right track?
Your children are your future. Every parent dreams big for their bright future; they even seek to provide the best to their precious child. While you embark on the journey to plan for their higher education / marriage, here are few typical things that should be kept in mind to ensure that you are on the right track.
Current trends in the education system
India has the third largest higher secondary education system in the world. Besides these, there are about 1,500 B-schools in India and the number of students passing out every year is over 100,000. As many as 156 foreign educational institutions, in collaboration with the local institutions have started their courses in India. Put together, India has about 220 million enrolled students, out of which 14 million are enrolled for higher education.
Since the late 1990s the higher education market is growing by over 7% a year. It is a good thing that on the one hand higher education has gained importance with literacy rates going up significantly and on the other side, there is fierce competition in terms of quality thereby pushing the cost escalation even higher. It's a simple rule of the 'Best being offered at a higher premium'.
I Dream of: The best for my child
Foresee the cost
Higher education / marriage may be a distant goal, but the earlier you start to plan, the more time you have at hand and the better you will be prepared for the impending expenses.
Projecting the cost requirement for a child would involve catering to the future rate of growth, and arriving at a tentative corpus that may be required depending on the current age of the child.
Here's an example of how to arrive at the required corpus for one-year-old child.
I Dream of: The best for my child
Mutual funds
Child benefit funds are best suited here, they come with a minimal lock in period, and their investment pattern is such that equity exposure is approximately 65%, thereby reducing the risk significantly.
The funds objective explicitly states that it seeks to generate capital appreciation with the aim of giving lump sum capital growth to the beneficiary (child) at the end of the chosen period. An alternate to this could be balanced mutual funds / diversified equity mutual funds, however, one should prudently plan to exit these in phases via profit-booking prior to the need and move it into debt funds.
Within debt mutual funds, gilt / income funds and fixed maturity plans are feasible options.
For marriage, one can choose to invest in gold mutual funds / exchange traded funds, the investment grows inline with the bullion market, one can redeem prior to the impending need and buy physical gold.
Use multiple avenues to plan
Now that you have the corpus in mind, you need to deduce the returns that you want to generate out of your portfolio. Based on this, you can design a well-diversified portfolio, which will help you optimise on returns at risk-adjusted levels. Here's a brief overview of various avenues available for investment
Child plans
The benefits under these children policies are designed coincide with the requirements of children at different stages of life, that is, at the time of higher education, settlement in profession or marriage, among others. There are various types of child plans
I Dream of: The best for my child
Term deposits
This has remained one of the most preferred investment avenues for a need arising in the short term. One can also exit equity mutual funds at relevant intervals prior to the need and park it in this avenue to utilise as and when the need arises.
PPF (Public Provident Fund)
This is an avenue that one often attributes to retirement, however, given the long tenure of this avenue -- 15 years -- one can choose to contribute some amount every year to churn out a part of the corpus from this avenue. This would typically work if the need arises over a 15-year time frame. You also have the option of making partial withdrawals in between, thereby providing you with some decent flexibility as well.
Conclusion
Planning for child education can be a step-by-step designed simple plan which you can either build by yourself or with the help of an expert. Have a part of the investment in avenues which provide for the required amount even incase of eventuality.
Review the performance of your child's education plan every year and make sure that things are going as expected. A good mix of debt-equity is key to optimise on your returns, at relevant risk levels.
Although you have planned it all, remember not to force your child to adapt as per your plan. Your child's future will not be successful, if they are unable to pursue what they are passionate of.
Takeaways
- Arrive at the cost, factor-in inflation / rate of growth
- Ensure that your are properly insured and the need is taken care of despite eventuality of the bread-winner
- Use a judicious mix of debt-equity to build the required corpus
- Sticking to the plan, this is the deciding factor of whether one is successful or not
- Monitor your investment at regular intervals, have a yearly review and adjudge if any changes are to be brought-in
- Start moving your money from riskier products to more safer products as you approach the need
Anil Rego is the founder and CEO of Right Horizons , an investment advisory and wealth management firm that focuses on providing financial solutions that are specific to customer needs.