A child’s professional or higher education is one of the most important financial goals for every parent . Parents start imagining right from their child’s birth that their baby will grow up to become a doctor, engineer, pilot or an astronaut.
But with the cost of education increasing drastically over the past few years, turning such dreams into reality may require a lot more planning than earlier.
Many schools in metros are charging fees as high as .Rs 75,000 to Rs 1 lakh per annum for a kindergarten student, which is probably equal to the total amount that our parents paid for our entire education. Tuition fee for IIM-Ahmedabad for the 2010-12 batch is around Rs 13.70 lakh, which may go up to Rs 57.23 lakh after 15 years, assuming education inflation at 10% per annum.
Calculate the amount you will require for your child’s education considering the current cost of a particular course and keeping the education inflation in mind, may be 10% per annum. Once you calculate the expected cost for your child’s education you can start investing monthly to build the corpus. There can be two methods of deciding the amount of investment.
One is investing a fixed sum every month throughout the accumulation phase. For example, if you want to accumulate Rs 50 lakh in the next 15 years you need to invest Rs 10,506 per month considering 12% return from your investment. If you feel the amount is quite big, you can follow the growing annuity method, where you start with a smaller amount initially and increase it subsequently with rise in your income .
For example, if you expect a 10% rise in your income on a year-on-year basis and decide that you will increase your investment accordingly. You can start with Rs 6,000 per month in first year and keep increasing it by 10% every year to build the corpus of Rs 50 lakh in the next 15 years with CAGR of 12% from your portfolio.
Buy An Adequate Cover:
Every parent wants that his child should get the best education. Parents should always buy adequate life insurance cover to take care of a child’s education in case of any unforeseen event. Sum assured may not be the amount which is required for the education in future but the amount which can generate an amount equal to that in future , considering some returns on that investment . Term plan can be the best choice to get the higher sum assured with low premium.
Stick To Your Asset Allocation:
Asset allocation refers to how much of the various asset classes you have in your portfolio. The idea of asset allocation is that if one of your asset classes in your portfolio performs poorly then returns of your other asset classes will balance the returns of your portfolio. Some general asset classes are equity, debt, gold and real estate.
You can consider equity shares or equityoriented mutual funds, fixed income instruments like fixed deposits, PPF, small saving schemes of post office, bonds, debtoriented mutual funds, gold or gold ETF etc. in your portfolio. Percentage allocation of each asset class in your portfolio may depend on your risk-appetite but don’t avoid equity just because it is more volatile than a fixed-income instrument.
We all know that equity has always delivered higher returns in the long-term but we should also not forget that a portfolio could be 40% down in 2008 if there was only equity in the portfolio.
Monitor & Rebalance Your Portfolio :
Monitor the performance of your portfolio regularly and take the necessary action, if required. Rebalancing is an important part of investment. Portfolio rebalancing is accomplished by occasionally resetting the proportion of each asset class back to their original percentage.
For example, you start investing a fixed amount every month in debt and equity in the ratio of 50:50 and debt delivers 8% returns whereas equity delivers 14%. Debt equity ratio in your portfolio will change to 46:54 after five year.
To rebalance your portfolio you will need to sell a portion of the asset which is more from the target allocation in your portfolio and buying the assets which are less.
So, proper planning, implementation and monitoring your plan periodically are key to achieving the financial goal for your child’s education.
Source: Economic Times
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January 20, 2011