Kids grow fast, but does your corpus for their needs keep pace?

India churns out around 1.5 million engineers every year and an estimated 3,300 business schools train tens of thousands of management graduates each year. The cost these students incur to study has been going up substantially each year. While it took around Rs. 2 lakhs to do an MBA a decade ago, it costs more than 20 lakhs now. Also, considering that many of these students study in institutes which are far away from home, there are additional expenses such as accommodation that they have to bear.

Therefore, it is important for parents to plan for the education of their child. Here is what you can do to ensure that the corpus you are building for your child's education keeps pace with her/his age and the education inflation:
Start early – It is not possible to beat the inflation by timing the market alone. The best option is to start early so that you can get the benefit of the power of compounding. The amount you set aside every year towards savings has a multiplier effect as your savings grow faster because you tend to earn interest on your interest! This compounding is more effective if you start saving early as the longer your interest along with principal earns interest, the faster your savings grow.

Treat equity as your friend – Most investors tend to avoid equities as they do not have the appetite to take risks associated with it. Even though there is an inherent risk associated with equities, they have an impressive track record of delivering excellent returns. You can afford to take this investment risk if you are looking at investing from a long term perspective, especially during the initial phase of the policy tenure. You can subsequently start reducing the exposure to equity during the last phase or the last 5 years of the tenure. This way you can benefit from high returns from equity without having to take undue risk. To cater to this need, some of the life insurance policies already have started offering dynamic fund allocation to automatically take care of requirement by adjusting the mix of debt and equity as per your requirement.

Awareness of inflation – Be aware that inflation eats into the value of the corpus you are creating for your child's education. Hence, review the corpus you are creating every year. The best time to review the corpus requirement is when you get your annual increment. That is the best time to correct your monthly / yearly contribution towards creating a corpus for child education. Many children education related policies offer the feature of annual increase in premium to take care of inflation.

Consider the changing family dynamics in future - Most common mistake which couples make while planning for their children education is not to account for future changes in family dynamics in their investment plans. For instance, expenses automatically shoot up when a baby is born and the household income may drop drastically at the same time as a result of one person taking a sabbatical to take care of the baby. You should account for such changes in your financial savings plan.

Indian economy has witnessed decades of rapid economic growth, which has increased spending power of its citizens. Global consultancy firm McKinsey estimates that the average disposable income in our country has roughly doubled since 1985. But most of this increase in spending power has only resulted in enhancing our lifestyle and not in financially securing ourselves for future. Even though one of the major concerns for many parents today is to send their children to top institutions for further studies, most of them are not aware about their financial preparedness. It may already be too late before they realise the severity of the issue. It is therefore necessary for you to not only start planning early but also to revisit our financial plan regularly to factor in your increasing prosperity and ensure that your children's dreams get fulfilled.

Parag Raja, executive vice president & head of agency, Max Life Insurance