EVEN at current prices, the cost of education is beyond the reach of a substantial section of the population. And with the State withdrawing from higher education progressively, the costs are only going to shoot up. Says Prof. S.K. Kejriwal,Faculty JNU, “Unless one plans about 10-12 years in advance, it would be impossible to provide good education to one’s child”. Investment portal apnapaisa’s Harsh Roongta says investments, especially focused on children’s education, must be part of any individual’s financial planning.
Way to go
Depending upon the interest of your child, identifying three to four specialisations or career choices the child might be interested in pursuing is the first step. This will help in assessing the cost of education accordingly, says education counsellor, Rita Sinha. And targeting the costliest programme is the best way to begin, since costs vary substantially across programmes and institutions. Thus while a government-run hotel management institute might set you back by about 60,000 rupees a year, the cost of a private college would be five times more or upwards of Rs. 5 lakhs. Moreover, with an average inflation of about 6%, the costs would definitely shoot up further. Once you calculate the expected cost for your child’s education you can start investing monthly to build the corpus.
Buy an adequate cover
Parents must always buy adequate life insurance cover to take care of a child’s education in case of any unforeseen event. “It is my father’s insurance money that came to my rescue when I was in the third year of B.Tech at IIIT, Hyderabad,” says Arunav Sinha. The claim payment not only covered his fees but also living expenses, with cash to spare.
There are various children insurance plans available in the market, which not only provide the basic risk cover that is an essential requirement of a long-term plan, but also provide a very good tax advantage. When compared with other investment avenues, child insurance policies have some advantages.
- The claims are made out to the children and not to the parents.
- There are no liquidity options like loans against policies etc., which ensures that the corpus saved is not diverted.
- The maturity claims are made at predetermined intervals, thus ensuring a guaranteed flow of funds at the right time.
|Examples of child-focused plans
- Baroda Pioneer Children Fund
- HDFC Children Gift Fund
- Peerless MF Child Plan
- SBI Children’s Benefit Plan
- UTI Children’s Career Balanced Plan
Where to invest?
Every financial instrument carries a certain risk to return factor. Stocks and shares might provide very high returns over medium or long term, but one should not forget that if all your investments were in stocks in 2008, by the end of that year which saw major upheavals you would have only 60% of the value (though some of the losses would be notional) you had at the beginning of the year.
So always strive for a balanced investment strategy depending on your age, risk profile and the amount of money available for investment. You could select from various options like equity shares or equity-oriented mutual funds, fixed income instruments like fixed deposits, PPF, small saving schemes of post office, bonds, debt oriented mutual funds, gold etc.
Deposits: This is the most traditional form of investment. Deposit could be fixed, recurring, special schemes like Public Provident Fund, etc. The interest rate is fixed and the returns are assured. But when inflation is continuously on the rise, these instruments may not provide adequate returns. “They must ideally form not more than 15% of your total investments,” says Dr. Abishek Mitra, a leading financial advisor in New Delhi. Bonds issued by private corporations too come under this head, but they do not have the level of security that government approved deposits carry. In fact, deposits up to rupees one lakh are insured under the deposit insurance scheme.
DIRECT EQUITY: Here one buys stocks/shares of corporations either during their launch or from the stock exchange. This is the most lucrative investment option, especially in the long-term, but one needs to spend sufficient time and attention to the market on a regular basis. This is best left to experts, especially if your corpus for investment is low.
If your are up to it, then stocks provide the biggest hedge against insurance and so keep on investing in good quality stocks in sectors that are upcoming. Book profits at regular intervals and invest the corpus into safer options like debts. That way one could continue to benefit from stocks, but keep capital erosion to the minimum levels.
MUTUAL FUNDS: For those of you who do not have the energy to study and invest directly in stocks, mutual funds are good means to get the benefit of stocks, while palming off the details of research and assessment to a set of professional managers. Enough mutual fund schemes are available in the market to meet all kinds of investment goals and risk profiles. Ideally one must invest in a basket of schemes that deal with debt and equity separately. There are specially designed children mutual fund schemes available now-a-days, which can provide even assured sums at predetermined points in a child’s educational career. Even though there is no uniqueness, in terms of overall investment strategy in dedicated children plans, they still provide the following advantages:
- Separate identification of savings for children.
- Some dedicated children schemes are less expensive than the general ones.
- There will also be a general psychological deterrent to use children funds for other causes.
Commodities: Investing in commodities like gold and silver has been practised in India from time immemorial, but traditionally they have been in the form of jewellery, whose purity, weight and instant trade-ability is all suspect in most cases. In recent times many financial institutions have being offering investment schemes that let individuals invest in rare commodities like gold, silver etc, in dematerialsed form and they are able to take physical possession when required in the form of coins or bars. With the commodities like gold showing very good returns in the last three four years, this is a good investment avenue, but again it must be restricted to 10-15% of your total investment.
Before we close: To be effective, investments have to be planned over a long-term horizon. Ideally the plan for investment must begin even as the child is born. In any investment, the earlier the beginning, larger the corpus and higher the rate of returns over long-term due to the power of compounding. Have an ideal mix of instruments. During the initial period, invest heavily in stocks and mutual funds. Also regular sums must be invested in recurring deposits and monthly income schemes with a substantial lock-in period so that the child has a regular source of income when it is needed the most. The Public Provident Fund is also an ideal scheme to invest since it has a lock-in period of 15 years and the corpus cannot be disturbed during the period. So plan well, choose the right investments, and relax. You could then give wings to your child’s dreams with little or no stress.