Planning Your Child’s Higher Education

by Gopal Gidwani on November 19, 2011 · 17 comments

in Financial Planning,Insurance,Others,Uncategorized

Goal Based Financial Planning (I) – Child Education Planning

Introduction
Every parent aspires his / her child to make a successful career when he / she grows up. Good quality education forms the base for that. Parents start planning for their child’s education the moment the child is born. Parents leave no stone unturned and explore all possible investment options when it comes to choosing an investment product for their child’s education. Parents do all it takes to make sure they have all the necessary finance in place when their child is ready to take admission for their higher education course. In this article we will explore how should parents go about planning their child’s higher education.

Steps in Child Education Planning
To understand the process of child education planning let us take an example. Rajesh’s son Mohit is 1 year old. Rajesh aspires that Mohit becomes a high profile investment banker when he grows up. For that Rajesh wants Mohit to take admission in one of the premier B-schools in the country. Rajesh wants to build an education fund for Mohit’s higher education. Let us see how Rajesh should go about building the education fund.

Step 1: Current Cost and Time Horizon
Mohit is 1 year old and he will take admission in a B-school when he will turn 20 years old. So Rajesh has 19 years in hand to plan the education fund for Mohit. As per Rajesh’s estimates the current cost of doing the MBA course is Rs. 10 lakhs.

Step 2: Calculate the Future Cost of the Course
Even though the current cost of the MBA course is Rs.10 lakhs it will be significantly higher 19 years down the line. With so many parents wanting their children to take admission in premier B-schools and with very few B-schools offering quality education, the cost of education is rising fast. The demand for premier B-school seats far outstrips the supply of seats, leading to a sharp rise in education costs in the last few years. This scenario is expected to continue in future also.

Let us assume that the cost of education will rise by 10% every year. The MBA course that costs Rs. 10 lakhs today will cost a whopping Rs. 55.60 Lakhs (Rs. 55,59,917 to be precise) 19 years down the line if education costs rise by 10% year on year. So Rajesh will have to make sure that he has a kitty of Rs. 55.60 Lakhs when Mohit is ready to take admission in a B-school.

Rise in Education Costs

 

Step 3: Make an Investment Plan
Now that Rajesh knows that he needs to build an education fund of Rs. 55.60 lakhs in 19 years, he needs to start thinking on how he should go about building this fund. With the help of a professional financial planner, Rajesh should draw up an investment plan that will help him realise his goal.

Rajesh has 19 years to realise his financial goal. If Rajesh invests Rs. 92714 every year (Rs 7726 per month) in mutual funds for the next 16 years and the investment earns 12% returns then at the end of 16 years he will have Rs 44.13 lakhs. Three years prior to the goal Rajesh can transfer the amount to a debt fund or some other fixed income security which will earn him 8% return. Thereby at the end of 19 years he will have his required corpus of Rs. 55.60 lakhs. To know which mutual funds will be good for Rajesh for long term investments click here.
The below table explains how Rajesh can build the education fund for his son’s higher education.

Sr. No.

Amount at the Beginning of the Year

Annual Contribution

Return on Investment

Amount at the End of the Year

1

0.00

92174.25

12%

103235.16

2

103235.16

92174.25

12%

218858.54

3

218858.54

92174.25

12%

348356.72

4

348356.72

92174.25

12%

493394.69

5

493394.69

92174.25

12%

655837.21

6

655837.21

92174.25

12%

837772.84

7

837772.84

92174.25

12%

1041540.74

8

1041540.74

92174.25

12%

1269760.79

9

1269760.79

92174.25

12%

1525367.24

10

1525367.24

92174.25

12%

1811646.47

11

1811646.47

92174.25

12%

2132279.21

12

2132279.21

92174.25

12%

2491387.87

13

2491387.87

92174.25

12%

2893589.58

14

2893589.58

92174.25

12%

3344055.49

15

3344055.49

92174.25

12%

3848577.31

16

3848577.31

92174.25

12%

4413641.74

17

4413641.74

0.00

8%

4766733.08

18

4766733.08

0.00

8%

5148071.73

19

5148071.73

0.00

8%

5559917.47

The above plan explains how Rajesh can accomplish his financial goal of Rs. 55.60 Lakhs in 19 years. Rajesh can invest in diversified equity mutual funds for 16 years and 3 years before the goal date he can shift his money to safer fixed income avenues. An investor should not keep his money in risky investments like equities till the last year of investment.

Step 4: Implement the Plan
For long term goals like child education planning, child marriage planning, retirement planning etc. where the time horizon is beyond 5 years, investors can choose to invest in a mix of diversified equity mutual funds and balanced mutual funds. Historically in India equity markets have given returns of around 15% CAGR (Compounded Annual Growth Returns) over long periods. To know which mutual funds are good for long term investments click here.

Rajesh decides to invest in a mix of diversified equity mutual funds and balanced mutual funds assuming that his investments will give returns of about 12%. Let us see how Rajesh can go about building Mohit’s higher education fund.

  • Rajesh will have to invest Rs. 92,175 annually (Rs. 7,682 monthly) for 16 years.
  • Assuming that Rajesh’s investments give him a return of 12%, at the end of 16 years the value of Rajesh’s fund will be Rs. 44.13 Lakhs.
  • After 16 years Rajesh can stop investing and 3 years before Mohit is ready to take admission in a B-school, Rajesh can shift the money into a fixed income security to protect his fund in case there is a sudden sharp fall in the market due to any unexpected event.
  • If the fixed income security gives a return of 8%, at the end of the 19th year Rajesh will reach his target amount of Rs. 55.59 Lakhs (Rs. 55,59,917.47)
  • Rajesh can use this amount to fulfil his dream of making his son a high profile investment banker by enrolling him for one of the premier B-schools in the country when he turns 20 years old.

Building Child Education Fund

Step 5: Review the plan regularly
An investor should regularly review the performance of the mutual funds that he has invested in to make sure that the selected funds are performing on expected lines taking him closer to his financial goal with every passing year.

Conclusion
Let us quickly summarise the steps to be followed for child education planning:

  • Step 1: Current Cost and Time Horizon
  • Step 2: Calculate the Future Cost of the Course
  • Step 3: Make an Investment Plan
  • Step 4: Implement the Plan
  • Step 5: Review the Plan regularly

We saw how Rajesh can go about accomplishing his goal of making his son a successful investment banker. Similarly with systematic financial planning, you too can realise your dream of making your child a successful investment banker or engineer or doctor or any other professional.

Do you have a financial goal in mind for your child??? Then what are you waiting for??? Do get in touch with your financial planner today!!!

For any comments please comment in the section below or email us at gopal_gidwani@yahoo.com

To know which mutual funds are good for long term investments click here

{ 16 comments… read them below or add one }

Chalapathi January 30, 2012 at 12:12 pm

Hi Mr. Gidwani, this is Chalapathi. I have gone through the article. It is quite informative. Please guide me through this. My sister wants to have a fund for her son by the time he finishes his +12 i.e., in 16 years from now (Now he is 1+). They can save upto Rs.10K at the max. per. month. Please suggest the way out and the names of difft companies too. Thaq.

Reply

Gopal Gidwani February 2, 2012 at 11:33 am

Hello Mr. Chalapathi,

To build an education fund for her son, you can ask your sister to consider investments in diversified equity Mutual Funds like
HDFC Top 200
IDFC Premier Equity
DSP BlackRock Top 100
ICICI Prudential Discovery

And some amount to balanced mutual funds like
DSPBR Balanced
HDFC Prudence
Birla SunLife 95

All these mutual funds have a good proven past track record

Reply

rajesh ambre March 15, 2012 at 5:45 pm

I want child policy for my son, age 4 months which will fullfill his educational need in future. I can afford to save 1000 for that purpose, is there any policy which will suited for my need?

Reply

Gopal Gidwani March 15, 2012 at 6:09 pm

Hello Rajesh,
I will suggest to keep insurance and investments separate. Buy an online term insurance plan for yourself and for your son’s education invest in diversified equity mutual funds. In mutual funds you can start with monthly investments of Rs 1000.

Reply

Saravanan June 27, 2012 at 10:43 am

Hi Gopal,

Really be impressive with ur articles. I have planned to buy ICICI smartChild RP for my child (1 year) for his future. But after reading this article, been little confused, should i stop buying (traditional plan). I can affort to pay around 20 K / annum for another 10 to 15 yrs. Pls. suggest some inputs.

Reply

Gopal Gidwani June 27, 2012 at 2:30 pm

Hello Saravanan,

Thanks for the kind words about the articles.

With regards to child education planning, I will suggest you invest in mutual funds. You can have a look at mutual funds schemes like
Large cap funds like ICICI Prudential Focused Bluechip Equity Retail, Franklin India Bluechip
Large and mid cap funds like HDFC Top 200, ICICI Prudential Dynamic
Mid and small cap funds like IDFC Premier Equity
Balanced funds like HDFC Prudence

Investing in mutual funds will give you much better returns than traditional life insurance policies. For life insurance cover I will suggest buying a term life insurance policy.

To know more about investing in mutual funds refer the following article on my blog
http://www.bachatkhata.com/2012/03/investing-in-mutual-funds.html

In case you want to get a customised financial plan made for yourself to take care of your financial goals then do write to me and I can help you with that.

Reply

Saravanan June 29, 2012 at 7:06 am

Hi Gopal,

Thanks for your input. I wouldnt great if you suggest some financial planing help for me. Pls. drop ur mail id to saravasu9@gmail.com. Before that it would be great if you can throw some lights on my basic queries.

Mutal fund / ULIP were market based finanical product, but in last 3 yrs, these product were not that much outperformed (Even Indian / global Market finds difficult to moveup) . I have even taken some ULIP but they were able to meet my premium amount (3 yrs). On what basis most of the people in finanical sector prefering to buy Mutal funds or ULIP products for their customer. This is not only my question most of the people how where not much into this, always have this in their mind, but unfortunately couldnt great right answer.

Reply

Saravanan June 29, 2012 at 7:07 am

Hi Gopal,

Thanks for your input. I would be great if you suggest some financial planing help for me. Pls. drop ur mail id to saravasu9@gmail.com. Before that it would be great if you can throw some lights on my basic queries.

Mutal fund / ULIP were market based finanical product, but in last 3 yrs, these product were not that much outperformed (Even Indian / global Market finds difficult to moveup) . I have even taken some ULIP but they were able to meet my premium amount (3 yrs). On what basis most of the people in finanical sector prefering to buy Mutal funds or ULIP products for their customer. This is not only my question most of the people how where not much into this, always have this in their mind, but unfortunately couldnt great right answer.

Reply

Gopal Gidwani June 29, 2012 at 9:13 am

Hello Saravanan,
Since the year 2008, the global economy is going through a tough time. India is not an exception to this. So stock markets have also given limited returns. But that said, there are mutual funds in the market that have given returns anywhere in the range of 10% to 20% CAGR in the last 3 years. These are very decent returns considering the tough economic scenario that markets are going through. So I dont think it will be appropriate to say that mutual funds / ULIPs have not given good returns.

I don’t track ULIPs, so I cannot comment on them. To make good returns in the market, you need to invest in good quality mutual funds, you need to invest regularly (SIP) and you need to have a longer term investment horizon (upwards of 3 years).

Besides investing in mutual funds, you portfolio should be diversified. Your portfolio should have a have a mix of equity mutual funds, debt, gold etc.

Saravanan July 4, 2012 at 11:13 am

Hi Gopal,

Thxs, for your valuable input.
1) Let me know one more basic query, how to buy MF, is any online opition is there else, we have to go to any broking comp.

2) Also, can you guide me what is the adv and disadv of Open-ended and Closed-ended, tried to understand but some were ok but not fully its features.
Which one do you suggest to go for.

3) If I planned to go for MF, should i need to check the previous years performance or also should i consider this year launched MF.

Thanks for your service, Hats OF..

Reply

Gopal Gidwani July 4, 2012 at 4:13 pm

Hello Saravanan,
There are 3 ways in which you can buy MFs online:
a) Intermediary websites like http://www.fundsindia.com, http://www.fundsupermart.co.in etc.
b) Directly from AMC website
c) Brokers like ICICI Direct or HDFC Securities etc.

I will suggest you go for open-ended mutual funds. You can sell open-ended MF units to the AMC when you want. Liquidity will not be a problem in case of open ended MFs

With regards to selection of MF schemes, instead of going for new schemes, I will suggest you go for MF schemes that have a proven track record. While the returns given in the past are important, it is just an indicator, and in future the MF scheme may perform the same or poor or better than the past performance.

Few things to be considered for fund selection include the track record compared to the benchmark and peers, the fund manager, the scheme objective/s (whether it matches with your requirement), the goodwill of the MF House, the expense ratio etc. etc..

Reply

Radhika December 25, 2012 at 9:25 am

Sir,
Today I happened to view your articles in bachatkhata.com. Really this website is very informative, useful and various topics covered are quite educative.
Good work. Keep going!
Thanks a lot for posting valuable insights.
With regards,
Radhika

Reply

Gopal Gidwani January 3, 2013 at 5:59 pm

Hello Radhika,
Its good to know the website articles are useful to you. Please share them with others also so that they can also benefit from it.

Reply

kanika September 17, 2013 at 7:06 am

Hi Gopal,

Your article is very informative. kindly help me with the following query.

I would like to save a good corpus for my retirement. I can manage to invest 10k per month for the mutual funds investments. kindly guide me as to which MFs are good option for starting investments.

Regards
Kanika

Reply

Gopal Gidwani September 24, 2013 at 3:51 pm

Hello Kanika,

For information on investing in mutual funds, please refer to the below article
http://www.bachatkhata.com/2012/03/investing-in-mutual-funds.html

Reply

Sanjay Patel September 14, 2016 at 2:43 pm

Hi
Thank you for giving me a wonderful information about child plan.
Thanks.
My baby 3 year old. I want 20 year pure investment . Per year approx 25 Thousand.
Which plan is best for me ?

Reply

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