Educating your children, SIP by SIP

Nothing works like a systematic investment plan, provided you start early

We all want our children to get the best education possible. By having a plan in place for them, you can make it possible for your child to have better options, both in terms of deciding the type of education as well as selection of colleges. Professional and quality education is crucial to success in today’s job market. These days, education, right from pre-school, takes away a major share of income. However, the biggest jerk comes when the child is in the age bracket of 15-22.

Here are some tips on investing for your child’s education.

Set your goals: Each investment objective needs to be converted into monetary terms. If one wants to provide for his children’s education, he needs to be aware of the money to be set aside for this task, the time after which he would be requiring the amount and also the amount required, which should be in today’s value. Also, if the money is required more than once on a regular basis, even that should be penned down.

Start saving when the children are young: Children grow up quickly. That’s reason all the more to start saving for their education when they’re still young. If you begin early and invest on a regular basis, you can put the power of compound interest to work for building a corpus for your children. Since the requirement is a big amount, you can select any investment with good returns in the long run. One way to plan for your children’s education is to set aside a specific portion of your savings for that purpose. As the adage goes, a stitch in time saves nine. The earlier you start, the better. Otherwise, you will have to give up on some goals entirely.

Time horizon and inflation: The most important thing is the time horizon you have; the more time you have on your hand, the lower would be the contribution required to have the same corpus. This also opens up your options in various investments. Equity as an asset is comparatively less risky over the long term as volatility is evened out. Equity or equity related mutual funds not only beat inflation but also provide growth in capital. This benefit could be taken only if one has a long-term horizon.

Investment alternative: By starting the investment process early, you can afford to take a moderately higher risk investment alternative, which gives a higher return. Options can be chosen from any good mutual fund — debt, equity or balanced.

A plain vanilla balanced mutual fund (not branded as a children’s scheme) may be a good option for an investor who does not wish to rebalance his investment from time to time. Here, the investor may be better off allocating his own assets between equity and debt.

I cite here the case of one of my clients, Amit Gangar, 32, who has realised the importance of saving early and started when his kid is just 3 years old. He has certain goals in mind for his son, Dipen.

Providing for Dipen's education: As the table shows, to achieve the required future value for the educational needs of Dipen, Amit needs to invest Rs 7,020 per month, which should grow at 12% p.a. Alternatively, he can invest Rs 7,06,935 as a lump sum amount, which should grow at 12% p.a.. The mode of investment should be through systematic transfer plan for a period of 2 years at least.

Recommendations: To meet you children’s education needs, a systematic investment approach through mutual fund is the best possible option currently available in the market. You should put an equal amount in different diversified schemes. This would not only ensure that you save regularly, but also help avoid any adverse impact of stock market volatility on the corpus.

The writer is a certified financial planner working as a relationships manager with SRE Financial Planners, Mumbai. The views expressed are those of the author and not necessarily those of FPSB  India. Feedback may be mailed to myplan@fpsbindia.org.