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Saving for your child's education
Published On , 21 Nov 2017 By TOI
The cost of education in India is increasing at a fast pace. From primary to secondary to higher education, parents are increasingly finding it difficult to meet the growing fee structure and other costs associated with education.
THE TARGET DATE APPROACH
According to National Sample Survey Office, be- tween 2008 and 2014, the average annual private expenditure for general education shot up by a staggering 175%. In other words, that is nearly 2.75 times jump. Again, during the same period the annual cost of profes sional and technical education increased by 96%, that is a near doubling of your expenses.
To meet the increasing cost of education, par- ents need to plan years ahead. So on the occasion of Children's Day, here are some steps for plan- ning an education fund for your child:
Working out how much funds would be required Determining the fund requirement is the first step. Professional education would typically be undertaken by a child after she turns 18. To estimate this requirement, the current cost of education has to be compounded annually by the ex- pected rate of inflation.
Calculating the current investment corpus required to fund this education basket
The above calculated estimated cost of education needs to be discounted back to the present value using the expected rate of return on a basket of investments. If one is short of this amount, regular systematic investments should be done to reach the desired Goal.
Start saving with the right asset allocation
Based on the investment horizon and the investor's personal income profile, an appropriate asset allocation model with the right mix of Equity and Debt investments needs to be put in place. A very conservative portfolio will not be able to generate the required rate of return for growing the funds to the amount required in future. Assuming your child is 10 years old and expected to utilise this education fund at the age of 20, the investment tenure of 10 years allows the asset allocation to be oriented towards Equity investments. The Equity investments can also be diversified across instruments like mutual funds.
Monitoring & de-risking with 'Target Date' approach It is important to monitor
and de-risk the education fund on a regular basis, especially as the Target Date approaches. The target date here for example could be your child going to college.
Target Date Investing resets the asset mix of stocks, bonds and cash equivalents in the portfolio as per the risk of the assets. For example if the requirement of education fund is after 10 years, majority of assets at the start of the investment process could be in equities. As the target date approaches, these assets would slowly move into less volatile Debt investments with finally the entire corpus moving into cash equivalents, liquid investments on the target date. This will protect the corpus from unforeseen market situations like a big crash just before you approach the target date.
Planning appropriately and maintaining financial discipline is the best way to achieve future Goals. You should think long term and invest in tax-efficient instruments. Your child's education fund should not be touched for any short term requirements. This will ensure there are no obstacles for your child to pursue her dreams. Happy Children's Day!
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