Child’s education: Sowing for a good harvest

Investing to build a corpus for your child’s education can be one of the most important goals of your life. After all, good education can help in laying a solid foundation for success throughout your child’s life.  One such important goal is getting a right plan for your child.

The problem, however, is that many parents, despite their earnest desire to provide the best education to their children, often fail to do enough to ensure this. It is important for every parent to remember that a major factor that can come between their dream and reality is the escalating cost of education. It is, therefore, necessary to plan for an important goal like this and start the process of investment as soon as possible, preferably as soon as the child is born.

A major chunk of the parents' savings goes into paying for their child's education. Studying in a decent school means shelling out a lot of money. Higher education abroad or MBA from well-known  institute means exhaustion of the limited savings.

There are parents who make on and off investments towards this goal, but often face the dilemma of how to save enough and that too without compromising other financial goals. Therefore, it is necessary to plan when it comes to securing the future of your child. Here’s what you can do to ensure that there is no gap between what you may need for your child’s education and what you accumulate over time for it: 

• Begin by establishing how much money you are likely to require for your child’s education. Be sure to consider cost escalation over the years. 
• Decide on the type of investments. If you begin early, investing in an asset class like equity can help you earn positive real rate of return. In other words, avoid low-interest yielding traditional instruments like bank deposits, small savings schemes, debentures and bonds. However, if you are a late starter, either these instruments or a fund investing in them will have a role to play in your portfolio.
• Monitor your portfolio on a regular basis. Even though you might not need the money for 12-15 years or so, it is necessary to make sure that your investments remain on track through your time horizon. Do not hesitate to realign your portfolio when necessary. 
• Doing so, would allow you to invest wisely and build a good corpus. It is also essential to know the time frames when you need to get the returns.
• Begin to shift your investments as your child approaches college-age. This will ensure that you won’t lose any of the money that you have worked so hard to save and make it grow.

Mutual funds provide an excellent vehicle for investing for your child’s education as they offer diversification, flexibility, tax efficiency, variety and simplicity. Remember, investing through a tax efficient vehicle like mutual funds can help you accumulate more for your child’s education. However, it is important to choose the right fund. Before deciding, you must work out your asset allocation i.e. mix of equity and debt. The asset mix will largely depend upon when you begin investing for investment process. If you start investing in between the time your child is born and till he attains the age of five years, you will have the maximum time to grow for this objective.

If your child is in the age group of 6 to 12 years, it would be prudent to have a mix of equity and debt, albeit with a bias towards equity. Therefore, the ideal option for this age group would be balanced funds. As the child grows older, an attempt should be move money to lesser volatile investment options. If your child is in the age group of 13 to 18 years, the right strategy would be to invest in funds that are least volatile. In other words, the focus should be on preserving capital. Also, liquidity should be an important consideration whiling working out the strategy. Investing regularly through a Systematic Investment Plan (SIP) is an ideal investment strategy for a long-term goal like a child’s education.  It is a proven fact that a steady plan, both in terms of savings and investments, help pursue financial goals.

Here are some important things to remember before you establish your regular investment process:

• Ascertain how much you need to invest to achieve your target. For example, if your goal is to accumulate a corpus of Rs.25 lacs after 15 years, assuming an annualized return of 12 percent from an equity fund, you need to invest Rs.5500 per month.
• Continue investing irrespective of whether the market falls or rises as it will help you in benefiting from “averaging”.
• Remember the objective for which you are investing throughout the period. This will enable you to remain focused on this very important goal of your life.
• For those who may like to opt for a readymade solution, there are established dedicated funds for children. Through these funds, one has an option of investing in a ready-made equity-oriented or a debt-oriented portfolio.