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Education Planning

“Children’s education is one of the biggest cash outflows that families must plan for” – Rohin Pagdiwala

“Children’s education is one of the biggest cash outflows that families must plan for” – Rohin Pagdiwala

A private college education in India costs anywhere between ₹8-20 lakh for the entire 4 year graduation course. Similarly a 2 year post-graduation can cost anywhere upwards of ₹25-70 lakh. And if you plan to send your child abroad for a foreign college education, tuition fees at Ivy League colleges in the USA are upwards of $70,000 per year. With the cost of boarding, books, and other overheads, the total cost would be more than $100,000 today.

How does a family plan for such large cash outflows? What should be the investment strategy for kids’ education?

Well, you can start by safely assuming a cost escalation of 10% per year. Unfortunately education costs have been rising at a much faster rate than standard inflation, making it all the more tricky to plan for it. One of the big advantages however of planning for kids’ education is that you will know the exact time period by when you will need the money.

Now depending on when you start (earlier the better), the investment strategy may differ. But here are some general principles:
Start earmarking investments for your kids as soon as they are born

Make sure you start SIPs in the name of the kids, as soon as they are born. This not only ensures that you get a long time (18-20 years) to prepare for the child’s college expenses, but by earmarking them in the name of the child, it prevents parents from the temptation of withdrawing the funds to spend.

Invest aggressively in equity

Equity has historically been the best performing asset class in India. With returns in the range of 14-16% annually over long periods of time, this is the only asset class that can grow faster than the ~10% annual rate of growth of college expenses. This is probably the only way to ensure that growth in savings outpace growth in college expenses.

Buy Term Insurance

One of the most important things is to protect your kids against possible future loss of life of either parent, and it’s consequent long term financial impact. Ensure you are prepared for this by buying adequate life cover using a pure term policy. The policy value should try and cover future cost of education.

Save more every year

Like you would do for your own retirement, for education expenses too, it is prudent to continue to increase savings as your income increases

Hedge against rupee depreciation

If you are certain that you want to send your kids abroad for education, expand your portfolio to include US equity funds. In addition to building a corpus for your child’s education, they can provide a natural hedge to the risks of rupee depreciation.

Get professionals to help

If all this is too much to manage, get assistance from financial advisors. Do not be penny wise, pound foolish.

Speak to us today on how we can help plan a bright  future for your child. Remember, our first consultation is free.

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