Long Term Financial Plan For Child's Education Should Be Equity-Heavy
- Since the rate of inflation for education costs & wedding expenses are usually 2-4 percentage points higher than retail inflation, equities can help you get inflation-plus returns.
- In India, several surveys among parents have shown that securing a child’s future through good education, and then taking care of the expenses for the child’s marriage are among their top priorities.
- Financial planners, advisors and fund house officials, say that just like every parent is concerned about the health of the child since the time of his/her birth, they should be as concerned about meeting the costs of the child’s education. “ Like they give the child various vaccines so that the child remains healthy all his/her life, they should also put in place a good financial plan for the kid, so that he/she is protected well.” said a top fund house official.
- Since a child has several years ahead of him/her before he/she needs a large chunk of money (we are assuming large fund requirement for higher education & then marriage). Parents should look at Systematic Investment Plan (SIP) in equity funds for the same. In the long run, an SIP in a good equity fund would create a corpus which is much larger than what a recurring deposit, a fixed deposit or an insurance plan can create.
- While calculating cost of higher education, it’s important to remember that in India, the long term average inflation rate for education cost is about 8-10% per annum. And the rate of inflation for costs of wedding has been 10-12%.
- You can use calculators for compound interest, cost of child education and expenses of wedding to estimate how much you need when your child goes for higher education, and when he/she is ready to get married.
Putting In Place An SIP
- Select one or two equity funds from a good fund house with a track record of several years
- Speak to family members to estimate when your child could go for higher education and when he/she would get married
- Fill up the application forms for the funds you have selected
- Fill up the ECS mandates for automatic transfer of money from your bank account to the funds
- Fill up the SIP mandates for the fund
- Be careful not to touch these investments unless under extreme conditions
- Review regularly if the amount of money required is sufficient, your investments are on track etc.
- If required, re-balance the portfolio
- Consult a financial planner/advisor
Source: ET