How to save for your child’s education

26 Sep

Delhi-based bank executive Tushar Rastogi earns well and doesn’t have too many loans. Yet, every three months, Rastogi’s bank balance drops dangerously close to four figures. This quarterly brush with temporary indigence is because of the 34,000 that goes towards the school fees of his sons Rishabh and Saurabh. “I am on tenterhooks when the fee has to be paid, praying that no unexpected expense turns up during that month,” he says.

A massive surge in education costs in the past five years has stretched the monthly budgets of middle-class households. While headline inflation has risen at an average annual rate of 6.54% since 2006, school education costs have shot up by almost 18%. According to an Assocham survey of 2,000 families across 15 cities, the annual school education expense on a child has risen from 35,000 five years ago to 94,000 now. “The cost of education usually rises twice as fast as normal inflation,” says T.R. Ramachandran, CEO and MD, Aviva Life Insurance.

If you are fretting over this sharp rise in school education expenses, there’s a bigger time bomb ticking away. Higher education costs are growing at an even faster clip. Five years from now, the tuition fee for an engineering course, currently pegged at roughly 5.5 lakh, would be close to 10 lakh. In 10 years’ time, it’s likely to cost around 18 lakh.

Experts say the amount needed for your child’s education will not seem so daunting if you start early enough. “Nothing appears to be a burden if you think long term and invest regularly,” says V Srinivasan, CFO of Bharti AXA Life Insurance. Even if you put away a modest 5,000 a month in an option that delivers a 12% return every year, you would build a 23.5 lakh corpus in 15 years. Increase the quantum of investment by 1,000 every year and see your corpus almost double to 47 lakh.

Sounds simple? It is, but though Indian parents feel strongly about the need to save for this crucial financial goal, they are unable to muster the investing discipline required to do so. Sanjiv Bajaj, MD of Bajaj Capital, talks of clients who start investing for their children’s education but withdraw the money three years later to go on a holiday. “Where is the discipline?” he asks.

Indeed, discipline should be the cornerstone of the education fund you set up for your child’s studies. How regularly you put money into this account and how frequently you dip into the corpus for discretionary spending will decide whether your child goes to a premier institute for higher studies or settles for a low-cost correspondence course. It will also decide the career path he charts for himself. “Education is an intergenerational goal. It affects the next generation and even the generations after that,” says Rishi Mathur, senior vice-president , products and marketing, Canara HSBC OBC Life Insurance.

HOW CHILD ULIPS CAN HELP

Insurance policies have discipline inbuilt into their structure. A child Ulip is especially very useful because it offers twin benefit. It not only covers the parent but also the goal he sets for his child. In case of an untimely death of the policyholder , the plan gives a lump sum payment to his nominee. The policy does not end there. All future premium is waived and the child gets the money for his education as originally planned by the deceased parent. It’s like two insurance policies rolled into one. Keep in mind, however, that this double benefit also means the charges of a child Ulip are higher than those of an ordinary Ulip.

A child Ulip works best if you invest in it for the long term (at least 12-15 years). Unfortunately, some Ulip buyers don’t see it that way. “Parents often take the wrong steps because of the incomplete advice given by financial advisers ,” says Suresh Agarwal, executive vice-president ,Kotak Life Insurance. In an online survey conducted by economictimes.com last week, 23.5% of the 1,145 respondents said that the option to stop paying premium after 3-5 years was the biggest benefit of a child Ulip. It’s probably what they were told by the agent to make the policy appear very convenient. “The flexibility to stop paying the premium of a child Ulip after 3-5 years is a feature meant for emergencies . It is not the core objective of the plan,” says Srinivasan of Bharti Axa. “If you stop investing after 4-5 years, you will get a pittance on maturity,” he says.

WHEN TO USE MUTUAL FUNDS

Clearly, child plans are long-term products. But what if you need the money earlier? If your child has already crossed 10 years and college is less than 8 years away, you may have missed the child plan bus. Don’t lose hope because you can always use a mutual fund to get to your destination. Mutual funds are cheap, transparent and easy to understand. Unfortunately , they are also far too lenient on the irregular investor. “We may be tempted to invest when the market is on a tear, and pull the money out when it falls, but this is the wrong approach. Invest regularly and systematically,” says Ashu Suyash, MD and country head, India , Fidelity International.

Perhaps the best way to invest in an equity fund is through an SIP. “It removes the emotion out of investments and rationalises the investment process,” says Nimesh Shah, CEO and MD,ICICI Prudential Mutual Fund. You can safely invest in a good diversified equity fund or a balanced scheme if your horizon is 5-8 years.

WHEN YOU CAN’T AFFORD RISK

Whether you are investing in mutual funds or Ulips, keep an eye on your asset allocation. You may have started with an equity-heavy portfolio, but as your goal draws nearer, shift to the stability of debt. This shift should start 3-4 years before the goal. When you are 2-3 years away from the goal, you should be invested completely in debt-based instruments. This is important because no college will give you a 6-month extension for paying the fee just because the markets have tanked.

So before you start saving for your kid’s education, check how far the goal is and then pick a suitable investing tool. Infuse a dash of discipline and you will be ready with the corpus when your child needs it most.

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