Knowledge Bank

Planning for Your Child’s Education

  • By: ASM Capital Services
  • December 18, 2019

The Rising Cost of Education
As a parent, you want to provide the best for your children. However, with rising costs, it is becoming increasingly difficult for parents to keep up with the financial requirements of raising and educating children. More and more parents are realising the need for financial planning to provide the best possible education to their children.

Keep aside the Rs 20,000 PS4 gaming console or the Rs10,000 toy car that you may want to purchase for your child, the annual tuition fee of junior school itself costs anywhere between Rs 2 lakh- Rs 5 lakh today. Higher education is much more expensive with a professional degree costing anywhere between Rs 10 lakh- Rs 30 lakh in India and higher for studies abroad. The amount that you would need for your child’s education will be much higher as you would be also spending on books, stationery items, hostel accommodation and food, if he or she chooses to study in a different city.

When seen as a whole, this is a significant amount for most people and many of us are not financially ready for this future need. Unless you get a windfall from a rich relative or strike a lottery or have an extremely intelligent child (who can easily get a scholarship), it is very difficult for most parents to cough up such a large amount in a short period of time.

Fortunately, you can increase your financial readiness by saving and investing towards this goal and can provide everything your child needs for his/her education.
To plan for your child’s education, you must first determine how much you will need in the future and then save and invest towards the goal, by choosing the right asset mix.

Planning for your child’s education

Let us consider an example:

Raj is 30 and works as a software engineer. He got married 2 years back and has been blessed with a baby girl. Raj puts aside Rs 15,000 from his monthly savings towards his daughter’s higher education.

Say, his daughter would like to pursue Engineering and an MBA thereafter.

An engineering degree from a reputed institute costs Rs 7 lakh today. Given the average rate of inflation at 8%, the same degree, in the same institute may cost approximately Rs 22 lakh 15 years hence.

Further, an MBA from a reputed institute in India costs anywhere between Rs 15 – Rs 25 lakh. The same degree, if she chooses to go abroad, costs Rs 50 lakh. Taking the yearly inflation rate at 8%, the same degree after 21 years will cost Rs 1.25 crore in India and Rs 2.5 crore abroad.

If Raj invests Rs 15,000 in an equity diversified mutual fund that gives a yearly return of 14%, then at the end of 15 years, Raj would have accumulated Rs 83 lakh to provide for his daughter’s engineering and MBA education.

The same would not have been possible if Raj would have opted for traditional investment options that provide a return of 8%-9%. Hence, planning early with mutual funds can ensure a bright future for your child.

Since most key goals like a child’s education are long-term, equity as an asset class provides the best option to generate higher potential returns. Mutual funds are one of the easiest and hassle-free ways to invest in equities in a systematic manner, over a long-term at periodic intervals (through SIPs). Not only are mutual funds professionally managed, but they are also tax efficient and work with smaller amounts to start with. They are ideal for saving for key milestones of your life like retirement planning, buying a home or planning for your child’s education.