Article Summary
- High and sharply-rising education costs increase the need for parents to start saving for children’s education as early as possible.
- Parents can use online calculators to estimate how much they need to invest to achieve the desired corpus in the future.
- Given the need for large sums, long term investments in equity & hybrid funds may be helpful. They typically provide good returns in periods of 8-10 years or more.
- With regular investments in mutual funds through Systematic Investment Plans (SIP), parents can get a head start on their efforts to accumulate a sufficient corpus for children’s education.
As parents, one of the most important things we want to secure for our children is a good education. However, with the cost of education rising steadily, especially for higher studies, it’s crucial to plan well in advance. At the same time, continuous increase in the high costs for higher education is a harsh reality. What is more, it is a trend that is expected to continue well into the future. Sample some relevant statistics:
During 2008-13, annual tuition fees at a prestigious Tech Institute in India increased by 80% to Rs 90,000* or 12.47% annual increase. By 2019**, it more than doubled further to Rs 2 lakh, or a 14.2% annual rise. This needs to be viewed in the background of prevailing general annual inflation of 7.31%^ in the 12 years during 2008-19. Needless to say, the charges are significantly higher for private academic institutions.
In this background, the question is how young parents can develop a suitable children’s education plan and consider the best long term investment option for their needs. Here are some practical financial tips for parents to plan children’s education.
Tip 1: Estimate costs
It’s important to have a rough estimate of how much your child’s education might cost. Keep in mind that education costs increase with time. So a four-year course costing Rs 8 lakh today, and witnessing a 10% annual increase, may become Rs 30.38 lakh in 14 years when you need the money. Also consider inflation when you make your estimates.
Online education calculators can help you estimate future costs, giving you a clearer idea of how much you need to save. You may use our Children’s Education Planner to get a quick estimate: https://www.utimf.com/children-education-calculator
Tip 2: Determine the investment period
Equally important for the success of a child's education plan is to estimate the time left for you to accumulate the money. For instance, in our above example, it is 14 years. Based on this period, you also need to estimate regular investments to create a corpus of Rs. 30.38 lacs. So, you will need to invest Rs 6,961 every month to meet the target on time, assuming a 12% annual return.
You can calculate the monthly amount needed yourself using our SIP calculator: https://www.utimf.com/sip-calculator
Tip 3: Start Early and Make Regular Investments
Starting early is one of the best things you can do when saving for your child’s education. The earlier you begin, the more time your money has to grow. Investing regularly, even if it’s a small amount, helps build a good corpus over time. Systematic Investment Plans (SIPs) are a great way to do this – you can invest a fixed amount each month, which not only helps with disciplined saving but also reduces the impact of market ups and downs over time.
In our example above, we needed Rs 6961 every month to reach an expected corpus of Rs. 30.38 lacs. A two-year prior headstart would have reduced the amount to Rs 5,226 per month. Thus, earlier the start, the better it may be for your investments.
Tip 4: Ensure Adequate Protection
Sometimes unexpected financial crises can eat into the savings earmarked for children’s education. Hence it is important to have adequate insurance cover in crucial areas such as life, health, car, and home. With adequate insurance cover and an emergency fund that can meet 6 months’ living expenses, you may not have to tap any long term investment option prematurely to meet emergency needs.
Tip 5: Consider Investing In Equity Or Hybrid Funds
To tap into the long term capital appreciation potential of equities, parents may consider investments in equity fund and hybrid funds. This can be done via lumpsum or SIP, as per your preference.
Figuring out how to save and invest wisely can make a huge difference in providing your child access to the best opportunities without putting a strain on your finances. We hope these tips help you on your financial planning journey.
Sources: * After increase by IIMs, IITs seek to double fees | India News - Times of India (indiatimes.com)
** Annual fee for UG courses at IITs hiked - The Hindu
^ https://www.statista.com/statistics/271322/inflation-rate-in-india/
The above calculation is for illustration purpose only and not an indication of the performance of any schemes. Calculations are based on assumed rate of return and actual return may vary. Performance may or may not be sustained in future. Please get in touch with your professional advisor for a detailed suggestion. The calculations are not based on any judgments of the future return of the debt and equity markets / sectors or of any individual security and should not be construed as promise on minimum returns and/or safeguard of capital. While utmost care has been exercised while preparing the calculator, UTI MF does not warrant the completeness or guarantee that the achieved computations are flawless and/or accurate and disclaims all liabilities, losses and damages arising out of the use or in respect of anything done in reliance of the calculator. The examples do not purport to represent the performance of any security or investments. In view of individual nature of tax consequences, each investor is advised to consult his/ her own professional tax/ financial advisor before taking any investment decision. SIP is a feature offered for disciplined investment of a certain amount on a pre-decided date in a specific mutual fund scheme, regularly over a period of time.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.