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Child education plans don't offer much flexibility

You can consider liquid funds, debt mutual funds, equity instruments and even Sukanya Samriddhi scheme to meet various goals concerning your child's education

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Children are a bundle of joy but they also bring along a lot of responsibilities - from the day-to-day needs to higher education in the future. If you are a parent of a toddler and wondering how to plan for your child's education, read on.

There's no doubt that everyone wants what's best for their children and companies selling the financial products and services exploit that fact the most.

Swapnil Kendhe, a Sebi-registered investment advisor from Vivektaru.com says, "As a rule of thumb, I recommend to avoid all products from insurance companies which have the word 'child' or 'child's future'. There are other financial instruments which would be more suitable." The same views were echoed by Mrin Agarwal, a Bengaluru-based financial educator and founder director of Finsafe India Pvt Ltd, a financial education company.

Ananth Ladha, founder of Invest Aaj For Kal and research head at PankajLadha.com, says, “Child plans or child education plans have a longer lock-in period. You are better off investing in an open-ended fund for higher education goal of a child as they give better flexibility to switch to other funds as per the market conditions.”

For long term goals, you need instruments which offer higher returns over a long time frame to beat inflation and also help you build an investment discipline. So you don't touch the corpus for short-term needs, which means you need to make a good budget and see what amounts you can set aside for both short-term as well as long-term needs.

Short-term goals: As soon as a child is born, there are a number of expenses and short-term goals which have nothing to do with education and will demand your attention. For example, birthday functions, etc. When it comes to education expenses, they are both short term as well as long term. So for short term goals such as starting school or yearly school fees and similar expenses, you should invest in liquid funds, said experts. Short term goals are those which have a time duration of a year or less.

Mid-term goals: Ladha says, “For such goals, use debt mutual funds. One can even use running income if need be.” Medium-term goals are those goals which you need to meet in around three years. Nowadays many schools take kids for national and international trips every few years. 

Long-term goals: There are goals such as retirement and your child's education. For the latter, Agarwal says, “Considering you have a toddler today, you have a good 13-15 years to save and invest. The cost of education isn't going to be small. Taking the equity route is the most appropriate choice."

This means you need to start investing in equity instruments. You could look at systematic investment plans in equity mutual funds. Agarwal said, "A healthy mix of balanced funds, mid-cap funds, for instance.” 

Kendhe, too, recommends the equity route. “When it comes to long-term goals, choose a 60:40 ratio in equity and retirement. In equity, invest in equity index funds and multi-cap category mutual funds. For retirement corpus, choose Employees' Provident Fund, Public Provident Fund.”

Then there's Sukanya Samriddhi, a Government of India-backed savings scheme for parents of a girl child, which is designed to build a fund for the child's education as well as marriage expenses. The account has a tenure of 21 years from the date of opening and withdrawals are not allowed until the child turns 18. Agarwal said, "Since you can't withdraw more than 50% of the balance after attaining the age of 18 for higher education expenses, it is important to make sure that equity investments are given priority." And even if you do invest in this scheme, make sure you have enough funds invested in equity.

Another important step you can take is to keep investing whatever monetary gifts your child gets over the years into equities or diversified equity funds to help meet the long-term goals.

When to stop: One of the most important things to remember is that you have at least two long-term goals. Retirement is not something you should ignore even as you save and invest for your child's higher education. 

Kendhe said, “Say, you earn a salary of Rs 50,000 and can set aside only a small amount for long-term goals. Even then, you should not ignore your retirement needs. A parent's responsibility is until the child's graduation. If the child wants to study further, he/she can take an education loan. For those who have a higher salary and a higher investable income, it is easier as they can have a separate investment strategy for specific long-term goals.” 

Also, there are a number of education loans which are available from banks and non-banking finance companies from where adult children can take a loan to fund their foreign education.

While planning for higher education is important, don't forget to teach your child a thing or two about money as children. Imparting financial education into your child will probably one of the most important things you can do to shape their future.

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