Planning Your Child’s Higher Education

by Gopal Gidwani on November 19, 2011 · 17 comments

in Financial Planning,Insurance,Others,Uncategorized

Introduction
In this article, we will explore how should parents go about building a fund for 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. He wants to accumulate money for Mohit’s higher education (MBA). 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 on 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
The cost of the MBA course will be significantly higher 19 years down the line.

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. 61.15 Lakhs (61,15,909.04 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. 61.15 Lakhs when Mohit is ready to take admission in a B-school.

Future Cost of Higher Education Chart

Do you want to learn how to calculate the future cost of your child’s higher education, step-by-step using an Excel sheet? Purchase our DIY (Do-it-yourself) financial planning book from Amazon: Goal based financial planning – Building a fund for child’s higher education and marriage

Step 3: Make an Investment Plan
Now that Rajesh knows that he needs to build an education fund of Rs. 61.15 lakhs in 19 years, how should he go about building this fund? A professional financial advisor can make an investment plan that will help Rajesh realise his financial goal.

Rajesh has 19 years to realise his financial goal. If Rajesh invests Rs. 86076 every year (Rs 7,173 per month) in an investment portfolio that earns 12% returns, then at the end of 19 years he will have Rs 61.15 lakhs.

Investment Plan for Higher Education

The above investment plan explains how Rajesh can accomplish his financial goal of Rs. 61.15 Lakhs in 19 years.

Do you want to learn how to make an investment plan for your child’s higher education, step-by-step using an Excel sheet? Purchase our DIY (Do-it-yourself) financial planning book from Amazon: Goal based financial planning – Building a fund for child’s higher education and marriage

Step 4: Implement  and regularly review the plan
Rajesh can consult his financial advisor and accordingly invest in a portfolio such that his investments generate returns of 12%. Let us see how Rajesh can go about building Mohit’s higher education fund.

Higher Education Implementation of Investment Plan

Rajesh can use this amount to fulfill 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.

Regular review of plan
An investor should consult his / her financial advisor regularly and review the performance of the investment portfolio to make sure it is performing on expected lines taking him / her closer to his / her 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 and regularly review the plan

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.

You can buy our book from Amazon: Goal based financial planning – Building a fund for child’s higher education and marriage

The book focuses on two important financial goals of all parents: (a) building a fund for their child’s higher education and (b) building a fund for their child’s marriage. In the book, we show you how you can calculate the future cost of your financial goal, step-by-step using an Excel sheet. We also show you how you can make an investment plan yourself, step-by-step using an Excel sheet.

Amazon Book Cover

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

{ 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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