How should parents plan their investments towards their wards’ education goals?

Saving enough money to secure a child’s future is one of the toughest decisions that parents face, given that they are bugged by the possibility of not being able to set aside enough finances to pay for their children’s higher education.

BankBazaar in its recently released annual report titled “Inflation, Education and Your Child” in July 2023 highlights, “The gap between aspirations and reality needs to be bridged. After home ownership, school and college education, in India or overseas, are shaping up to be the largest expenses Indian families will bear in their lifetimes. This expense can put a dent in their savings. For parents, especially in the 35-45-year age bracket, providing for their child’s education remains a top priority.”

Education costs are rising, which means that saving money would not be enough. Wards must now consider more than just savings. They must look for ways to grow their money through investments that may be traditional or market-linked depending on their financial goals and risk appetite.

Parents must look at major decisions involving their children’s education, which is beyond their choice of career options. Inflation, for example, is a major factor that would affect such decisions as the costs of education continue to rise each year.

Willing parents cannot afford to ignore the following facts while trying to save funds for their children’s education.

Estimated cost of higher education

Estimating the cost of your child’s education is not easy. This is because of the myriad factors at play including the type of education institution (domestic or foreign), location of the institution, choice of career, and more. Most importantly, parents must set a time horizon in mind before they decide how and where to invest in favour of their children’s education.

Being aware of how much time you have to raise the funds matters helps decide your investment horizon. This involves considering important questions such as, “What is the timeframe until your child begins college? A longer time horizon allows your money more opportunity to grow.”

Start investing early in life

You beat most of the odds when you have time on your side. In the realm of investing, initiating early brings significant advantages. By starting early, you harness the full potential of compounding, allowing your wealth to grow exponentially. Consistent investments, irrespective of the amount, can lead to the accumulation of a substantial portfolio over time.

Let us illustrate the importance of time in the wealth creation process with the help of the following example. The calculations have been estimated after adjusting for inflation.

Time is your biggest ally when it comes to investment. More time translates to a bigger maturity amount as the magic of compounding allows more interest to be earned and reinvested back into the investment opportunity.

Make smart investment choices

Trying to save more should not prompt parents to put all their savings into market-linked investment opportunities. Volatility is a matter of concern, which is why sticking to only one plan or one kind of plan will never help. The best way out is to identify long-term investments that yield high returns while allowing enough room for stability.

Investing in a PPF account

To start with, you may put your money in a Public Provident Fund (PPF) account in your child’s name. This 15-year investment journey promises a yearly interest of 7.1 per cent, which is good with the magic of compounding effecting its considerably reasonable returns in the long run.

Take, for example, you invest ₹1,50,000 every year for the next 15 years in a PPF account opened in your child’s name.

Annual Investment Amount: ₹1,50,000

Interest Rate: 7.1% per annum

Investment Tenure: 15 years

translates to

PPF Maturity Amount: ₹40,68,209

Investing in an ELSS fund

Equity Linked Savings Scheme (ELSS) is a mutual fund variety that allocates a minimum of 65 per cent of its assets to equity and equity-related instruments. Consequently, ELSS funds are exposed to the inherent risks of the stock market, including volatility and market downturns. However, these funds also carry the potential to yield higher returns compared to other investments like fixed-income securities.

Before considering ELSS as an investment option, it's essential to evaluate your risk tolerance and investment objectives. If you are uncomfortable with the risks associated with the stock market, ELSS may not be the most suitable choice for you. Conversely, if you seek an investment vehicle with the potential for higher long-term returns, ELSS could be a viable option to explore.

Here are some advantages of investing in an ELSS fund:

Tax benefits: ELSS investments qualify for tax deductions under Section 80C of the Income Tax Act, 1961. You can claim a deduction of up to ₹1.5 lakh on your ELSS investment.

Potential for higher returns: The ELSS funds offer the potential to generate superior returns compared to investments like fixed-income securities. However, please bear in mind that returns are not guaranteed, and there is a possibility of your investment losing value.

Short lock-in period: The ELSS funds come with a lock-in period of three years. During this period, you cannot withdraw your investment. Nevertheless, this lock-in duration is relatively short when compared to other investment options like PPF.

Though ELSS funds come with a short lock-in period, continuing the investments for a decade or more will help earn better yields in the future.

The following table illustrates estimated returns from 10-year investments in various ELSS funds.

Investing in ULIPs

Investing in a Unit Linked Insurance Plan (ULIP) can serve as a smart strategy to secure your children's future. ULIPs provide a unique combination of insurance and investment, offering peace of mind while fostering the growth of your child's savings over time.

Here are the key benefits of considering a ULIP for your child:

Life insurance benefit: ULIPs come with life insurance coverage, ensuring that your child's financial well-being remains protected in the unfortunate event of your demise.

Investment opportunities: With a ULIP, you can invest your funds across various asset classes, such as equity, debt, and money market instruments. This diverse investment approach can aid in the gradual growth of your child's savings.

Tax advantages: The ULIP investments qualify for tax deductions under Section 80C of the Income Tax Act, 1961. This means you can claim a deduction of up to Rs. 1.5 lakh on your ULIP investment, reducing your tax liability.

Flexibility: The ULIPs offer a range of features that allow you to tailor your investment according to your specific needs. This includes choosing your preferred investment options, making partial withdrawals, and even surrendering the policy if required.

By embracing a ULIP as an investment vehicle, you can not only secure your child’s financial future but also benefit from the combination of insurance coverage and potential investment growth.

Review your investments regularly

As your child matures, it's crucial to periodically reassess your education plan to ensure it remains on course. Adapting your investment amounts or the time horizon is necessary to accommodate any changes in your circumstances.

Furthermore, it is essential to regularly evaluate your investment strategy to ensure it stays in line with your objectives. As your child grows older, you might consider gradually transitioning towards more conservative investments to safeguard your capital. Staying informed about fluctuations in education costs, tax regulations, and investment performance is also advisable.

Shield your investments against risk

Nothing secures more than adequate insurance coverage. Irrespective of how much or where you have invested, all your efforts are futile unless you top it up with a proper life or health insurance plan.

Life and health insurance are indispensable safeguards that shield both you and your investments during challenging times. For those with dependents, especially children, obtaining sufficient insurance coverage for yourself and your family becomes vital as it ensures the security of their future well-being.

Preparing for your child's education might seem overwhelming, but initiating early is crucial. When it comes to investing, maintaining a disciplined approach can significantly impact your wealth-building endeavours. Ensure you commence investing early to provide your children with the bright and promising future they deserve.