Education is the foundation for a person's progress. Parents believe in educating their children and making them productive human beings. That is why every couple tries its best to educate children. However, this is a very expensive affair. In these days, when education too has become commercial, parents have to spend lakh of rupees for giving valuable education to their children. It is not at all an easy task. Now it is essential that children in general take the right decisions regarding education. See what they are..
Rise in fees year by year
Two-year management course in Indian Institute of Management (IIM), Ahmadabad, is Rs. 19.5 lakh, as of 2018 academic year. This is 400 times more than the fees charged by the same institute, in 2007. If the fees are increasing, say at the rate of 20 per cent every year, fees for the same course in the same institute will be Rs. 95 lakh, in 2025. It is well known that Indian Institutes of Technology (IITs) have increased the annual fees from Rs. 90,000 to Rs. 2 lakh, for engineering courses. This is just tuition fees. Parents have to spend Rs. 8 lakh, for their child to complete four-year engineering course. At the rate of 10 per cent inflation in education expenditure every year, the same course will cost Rs. 17 lakh after eight years. In 2030, the same course will cost Rs. 30 lakh. Finally, even coaching institutes are charging high fees, for training children to attend the entrance exams. It you want your children to be highly educated, you should be willing to save a lot for it.
Investment as per goals
Investment depends on the goals and the expected revenue. It also depends on the child's age. If you start investing early, the revenue is more, because of compounding interest. If you start investing when the child is one-year-old, it will be 15 years by the time he or she reaches college. A Chennai-based couple, Saravan and Samudra, have a four-year-old son. Their aim is to save Rs. 90 lakh to Rs 1 cr for the higher education of their son. They started saving Rs. 5,000 a month, under Simple Investment Plan (SIP), in three midcap funds. They planned to increase their SIP by Rs. 5,000 every year. At this rate, they were able to save Rs. 1 cr in 13 years. Let us say, another couple plan to make Rs. 25 lakh in 18 years. They will have to invest Rs. 5,004 per month, from the third year of their child. If they wait up till the child is six years, they will have to spend Rs. 9,195 per month on SIP. If they wait for another three years, when the child is nine years and they will need to spend Rs. 23,875 per month on SIP. This is just estimated revenue from equity funds.
If there is some time gap between the goal and when you begin investing, there is a chance of taking a risk. If you start late, you can save only through conventional means. If you save in equity mutual funds, you can earn 15 per cent more revenue, within five years. The same in conventional means of deposits like bonds, will not fetch more than seven per cent in the same time. Those who are hesitant to take a risk, will have limited returns. Such kind of people, will have to invest huge sums in the form of deposits. They can examine mutual funds, monthly income plan. Here, 80 per cent is invested in conventional deposits, while 20 per cent is saved in equity funds. You can check out Post Office Recurring Deposit (RD). Here, you will get 7.6 per cent interest. But RD is not suitable to those who are paying 30 per cent tax. The income that is on hand after paying the tax, is very less. They can invest in short term debt funds. They can be exempted from taxes, if they invest for over three years in this. Returns are between seven to eight per cent. There is no tax on annual income funds. But IT is charged when the funds are withdrawn. Despite low interest rate, inflation effect on revenue apart, other benefits will be taxed. While investing in equities, for children's education, keep reducing the investment, from five years before you reach your goal. Divert the conventional bonds and deposits. As such you will have protection for your returns.
Not in child plans
Do not go in for child plans, offered by insurance companies. These are either conventional or unit-linked policies. Usually, when the father is the policy holder, the children are nominees. If the policy holder is alive until the end of the policy term, the amount due to him is paid. If the policy holder loses his life in between, the amount is deposited in the name of the nominee. Instead of this, invest in any mutual funds schemes, on the advice of a financial expert, which might involve some risk. Invest every month in the form of SIP. The parent can take a term policy. Select a policy that would cover the education of the children as well as the needs of the whole family. This way, insurance cover can be bought for a very low premium. You can also earn returns on mutual funds, besides this. For example, if you invest Rs. 3,000 per month in child plan for 15 years, and if the policy holder is alive throughout the plan period, you can earn Rs. 6,50,000. Insurance cover in this is only Rs. 4.5 lakh. Now if you invest Rs. 2,900 out of the Rs. 3,000 every month, keep the Rs. 100 aside for insurance premium. You can get Rs. 6 lakh insurance cover. Returns on mutual funds, at the rate of 10 per cent will be Rs. 12 lakh and at the rate of 12 per cent will be Rs. 14.5 lakh.
If you need Rs. 1 lakh now for graduation, the same will be Rs. 7 lakh after 10 years and Rs. 15 lakh after 20 years. For post graduation, if it is Rs. 10 lakh now, it will be Rs. 22 lakh after 10 years and Rs. 80 lakh after 20 years, according to experts estimates. First how much time you have, second how much you need and third how much risk you can take...depending on these three factors, how much investment needs to be made every month can be estimated.
Investment over the time
You need Rs. 30 lakh and you have 20 years. In this case you must invest Rs. 5,000 per month in schemes that give eight per cent interest. In schemes that give 10 per cent interest, you can invest 4,000 per month. A sum of Rs. 3,000 per month in schemes offering 12 per cent interest and Rs. 2,500 per month in those offering 14 per cent interest can be invested.
You need Rs. 30 lakh, in 15 years. You will need to invest Rs. 8,000 per month in schemes that offer eight per cent interest. In schemes offering 10 per cent interest, Rs. 7,000 per month, for 12 per interest, Rs. 6,000 per month and for 14 per cent interest, Rs. 5,000 per month can be invested.
You need 30 lakh in 10 years. Then the investment increases to Rs. 15,000 per month at eight per cent interest, Rs. 13,000 per month at 10 per cent interest, Rs. 12,000 a month at 12 per cent interest and Rs. 11,000 a month at 14 per cent may be invested.
What kind of funds?
Those who cannot afford risk, short term funds, bond funds, fixed deposits etc. would serve the purpose. For less than five years, investment can be made in fixed income instruments. The returns are less but the funds are secure. Public Provident Fund (PPF) is also useful. But it serves no purpose if the time gap is just three to four years. Balanced funds, that is equity and debt, are also good.
ICICI Providential Value Discovery Fund returns are 20.57 per cent for five years and 22.98 per cent for 10 years. Birla Sun Life Frontline Equity Fund returns 15 per cent for five years and 20 per cent for 10 years. HDFC midcap opportunities fund offers 22 per cent returns for five years and 17.58 per cent for 10 years. Franklin India High Growth funds offer 26 per cent for five years. Canara Robeco Emerging Equities Fund offers 30 per cent for five years.
In Balanced Funds, where equity and debt funds are mixed, HDFC and Birla Life offer 19 per cent for five years. In Birla Life, it is 14 per cent for 10 years. ICICI Prudential offers, 17.57 for three years (this scheme began in 2013). Besides investing in funds, it is better to observe their growth annually. If there are losses, remove from them and invest in another scheme. Do not sell the funds away, because it is facing losses. It is better to wait and watch. Once a year, rebalance the investment portfolio as per working of the funds. Never use the funds meant for retirement for any other purpose.
Sukanya Samruddhi Yojana
This is a convenient scheme for girls' education and marriage. Investments can be made until the girl is 10 years of age. Interest rate is 8.4 per cent. No income tax is charged. It can be withdrawn, when the girl is 18 years of age.
Those who have 15 years time for children's education but do not want to take risks, can invest in PPF. The interest is 8.1 per cent per annum. It is totally exempted from tax.