Plan for your child's education

The amount spent on a child’s education isn’t an expense. It is an investment that earns high returns going forward in terms of career opportunities and growth. The initial scope for employment, starting salary and subsequent promotions all correlate to the level of education, the higher the better.

However, the education costs also rise substantially the higher one goes. Therefore, it is important to plan for your child’s education well in advance and start investing so that the goals can be achieved.

If you want your child to study abroad, pursue a management course at a recognised institute, become a doctor or engineer, the costs can be staggering to say the least. And this is at today’s rates.

Rising costs
Consider the scenario ten to fifteen years later, when your child will need access to the amount. Will it be at today’s rates? Of course not, it will be at the rate prevailing then. Now think about how education costs have increased over the past ten to fifteen years and try to imagine how much higher they will be when your child needs to take admission. Scary, isn’t it?

Traditional approach
In India, fixed deposits have been the traditional response to such a situation. The mindset is that earning interest at 6 to 7% per annum should surely be good enough to cope with higher education rates. However, this approach fails to take an all-important aspect into account – inflation and tax.

Inflation impact
If one assumes that the inflation rate prevailing in the economy will be about 7%, the interest earned on a fixed deposit (adjusted for taxes) will effectively be negative. You would be earning less than the decline in purchasing power of money. And education costs tend to rise at a rate that is even higher than inflation. Therefore, the answer is to invest for your child’s education by putting your money into instruments that can beat the rate of inflation over that 10 to 15 year period.

Possible avenues
The equity markets have consistently outpaced the inflation rate, so investing in them is one way to go about achieving your goals. This trend is usually driven by the fact that inflation and fast growth go hand in hand. This means the companies that one invests in do well and witness rising stock prices. Given the inflationary environment that generally prevails in India, it is advisable to consider options that generate a positive return.

Investment alternatives
Investing directly in equity is a game for seasoned players with in-depth knowledge, deep pockets and the capacity to ride out the market cycles. For those who lack these, there is a simpler option – mutual funds. Here, you get the advantage of professional experience and expertise as there is a professional fund manager who understands the market dynamics and invests in a scientific manner. Plus, the larger mutual fund corpus provides scope for more diversified investments.
While there is a certain amount of risk involved while investing in equities, a mutual fund investing in equities offers a better opportunity for growth than investing as an individual.

Managing risk
While equity funds as invest principally in stocks, investors looking at reducing their risk exposure can also look at balanced funds, which invest partly in stocks and partly in fixed-income securities, in order to maintain a ‘balance’ in returns and risk. A new trend visible is mutual funds that also have goal based plans for children. While this is a niche category and there are very few funds that do this, the option is available for those who want to plan for their children’s future in a systematic manner.

Gain more insights into planning for your child’s education using equity funds and balanced funds in the next issue of dna of wealth