Parenthood is the most beautiful and important phase of our lives. The utter joy of having a child is blissful but at the same time, it brings in a set of responsibilities. We want the best of things for our children be it- a good lifestyle, food, clothes and education. However, with inflation on the rise, judicious financial planning has become the utmost priority. The cost of higher education these days is no less and is rising at 6-8% every year.
It was easier for earlier generations to pursue higher education at affordable prices because the competition was low. However, now the scenario of higher education has changed drastically. The increasing competition amongst government universities is pushing students to move to private institutions.Therefore, building a financial corpus for your child is essential provided you start at the right time.
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Assess the target corpus
Estimate the amount you will need to achieve in order to fund your child’s higher education when he/she grows up. While it may be difficult to know your child’s career choices at a young age, you may take 2-3 career choices and decide the amount accordingly. The rate of inflation should be a big factor when deciding the right corpus for your child’s higher education needs. For pursuing an MBA from a private college in India, currently it costs ₹30 lacs. Suppose your child is 1 years old today, then at an inflation rate of 6%, you will need a corpus of ₹1.02 crore by the time your child attains the age of pursuing higher education.
Similarly, college fee for studying MBA from abroad can go upto ₹60 lacs. So, if your child is 1 years old today, when he becomes an adult, you will need a corpus of ₹2 crore considering the inflation rate of 6%.
Today, doing an MBBS from a private college in India costs around ₹30 lacs. By the time your child attains the age of pursuing an MBBS course, you will need ₹1.35 crore keeping in mind the rate of inflation at 6%.
For doing MBBS from abroad, you will have to build a corpus of ₹2.02 crore for your child as currently, the cost can go upto ₹75 lacs.
Once you have planned the corpus needed, calculate the monthly amount to invest with the help of an online SIP calculator.
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Start early
The best time to start investing is now. A delayed investment can shrink the corpus you need to build in a few years. One should believe in the power of compounding wherein the longer you invest, the higher the corpus will be. For example, if you want to invest ₹500 per month in an SIP for 30 years, it will offer ₹71.6 lacs at a CAGR of 18%. Whereas investing ₹500 per month for 10 years turns out to be worth ₹1.7 lacs only.
Invest in the right instruments
Equity investments are considered ideal when it comes to creating wealth in the long term. Given the market volatility, investing in equities via mutual funds route is a great option. One of the advantages of investing through mutual funds is that the stocks are managed by a professional fund manager who has the expertise in portfolio management. Through a mutual fund, one can invest in a pool of assets such as equities, bonds, cash, commodities. Diversification of financial portfolio further reduces the risk of losing out on potential returns.
Mutual funds also allow small investments in the form of Systematic Investment Plans (SIPs) to help you achieve your long term financial goals. Another advantage is that they are transparent in nature. The entire portfolio and investment strategy is publicly announced and net asset value is updated on a daily basis.
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Buy a term plan keeping in mind the corpus for child’s education
Sudden demise of the sole breadwinner of the family can put a halt to regular investments for the child's higher education corpus. A term plan provides death benefit to your family in the unfortunate event of your demise. This is provided in exchange for a premium for a particular term. The premium paid towards term plans is very low. You must factor in your child’s higher education when deciding the coverage amount for your term plan.
Review your investments regularly
It is important to review your funds’ performance every year as much as investing in one. Compare the returns generated in one year with peer funds and benchmark indices. If your mutual funds have underperformed as compared to peer funds and benchmark indices in the last three years, then switch to a better mutual fund.
Sanjiv Bajaj is the Joint Chairman and Managing Director of Bajaj Capital