Saturday, December 3, 2011

[] How to plan for your Child’s Higher Education


Saving to pay for your children's education is similar to any other long-term financial goal.  The earlier you start saving for your children's education, the better. Education costs are usually a long-term goal that can take more than 5 -20 years to achieve. The cost of education is one of the fastest growing life costs in our country, growing at around 5-10% a year.  There's no way of calculating exactly how much it costs to educate a child. It will depend mainly on the type of schools they attend, the nature of professional course they wanted to enroll etc. Eg. You may plan your child for management course but your child may sometimes like to go for Medicine.  There is a huge difference in money required to completing management course and Medicine. When planning to save for your child's education, it can be hard to know where to start.

 Some of the fundamental requirements to build up a good corpus for your child's future include chalking out a goal with a clear time frame and corpus requirement, making regular and systematic contribution, being clear about the returns expected in each of the instrument and the tax  implications, inflation effects  over a long period for each of the instrument selected. When come to invest another factor you need to consider is inflation, the persistent changes in the inflation will inevitably decreases your income regardless of how cautious your saving strategy is.  In the future, the cost of living will only increase. 
 The cost of college/professional education when compiled with a tough unemployment situation will be the two main issues your child is going to face when he grownup.  You may sometimes need to find means to tackle/finance for the future unemployment situation of your child also. (Does anybody expect just 10 years back the present unemployment situation in America and other developed countries). 
First thing get to know yourself and make sure you are prepared and able to put money for a length of time.   Ask yourself how you would feel it that investment was dropping over time.  It is only advisable to make stocks and shares investments if you are comfortable with risk otherwise go for risk free debt instruments like bonds, government securities, bank term deposits etc.
It is worth to say here that, some private schools in western countries allow the parent to pre-pay their children school fees up to 10 years in advance. With school fees typically increasing for the last so many years and likely to continue the increase in the future also, the ability to save money by prepaying fees a number of years ahead becomes significant.  I am not sure the same type of pre-payment tuition fees facility is available in India.  This option has got advantages like that so many disadvantages are also there.
Unfortunately, in India most of us have not realized the importance and benefits of proper and timely educational planning. This is all because of lack of awareness, huge debts, low income, improper financial planning and lack of need based investment solutions.
Having the money available when children start school is a better option than borrowing to pay school fees. Paying interest on the borrowings can sometimes double the amount you would pay if you had saved the money. The key to funding your child's education is to start early and save regularly. But there is a catch to saving for your children. It is not as straightforward as opening an account and contributing regular savings.   When planning to save for your child's education, it can be hard to know where to start. In the following paragraphs I have provided the details of some of major investment options, and what are all the factors to be considered when reviewing them, as well as the tax treatment of any earnings, you need to consider things like the nature of the underlying investments, the level of risk they carry and the likely level of returns that you will receive.  Considering all the above, the various instruments that can be looked at in the current circumstances are:

Mutual Fund Schemes - There are plenty of mutual fund schemes presently available in the market to meet each and every need of an individual with a various risk appetites.  It is always recommend for Systematic Investment Options to a get the benefit of cost average.   Mutual Fund investments are subject to market risk; this SIP mode investment will reduce the risk aspects and enhance your returns.  It is proved that, in the long run Mutual Fund investments are potential enough to deliver returns when compared to other investment options.  It is better to start early to reap the benefits of compounding.     Eg. If you deposit Rs. 10,000.00 each, every month in one of the good performing mutual fund schemes for 20 years, assume an average 12% return you will get Rs. 91, 98,500.00 at the maturity this is the power of compounding.  Please note that this is only an example just to show the power of compounding.     One should carefully choose a basket of schemes, which should be a combination of debt and equity investments. There are designated children mutual fund schemes are available, which can be combined with good diversified equity funds, which together can provide a much better growth opportunities in the long run. Those schemes launched specially for children named Education Fund, Marriage Fund, Children Career Plan, Young Citizen Plan, and Children Growth Plan.  Don't look for the scheme label or branding instead look for the consistent performance and track record of the individual's schemes.   Always, select consistently performing schemes with good track records and avoid New Fund Offers (NFO).  Finally the scheme you are going to select should match with your risk appetite and return expectations.

Insurance Plans - There are many different brand names for this type of children savings plans especially insurance products.  Even though each name mean essentially the same thing, it is sometimes easy to get confused.  Although these insurance plans  are sometimes know as "Child Welfare Plan",  Children Savings Plan", "Children Education Plan" , "Child Advantage Plan", "Marriage Endowment Plan" etc. just remember that the Children's Saving Plan is simply a way of investing in for children.   But I personally feel this branding is jut for exploiting the sentiments of the parents and give them a feeling that no other products available exclusively for the investment of their children.  Moreover It is also be very clear that the risk cover under these policies should clearly be on the earning parents and child's life should not be covered.  Another advantage of investing in Insurance Plan is tax benefits; even otherwise also the parent can claim the tax benefits. Also, the returns generated by insurance policies are much less when compared to other investment options.
 My question here is, why you wanted to go for this branded products when other good financial options are available for investments.    From the point of income tax, finally the parent is liable to pay tax, if the income from the financial instrument is taxable.   Instead of going for child Branded insurance products, it is suggested to take a traditional term policy to cover your life at a cheaper premium.  This will take care your family, if some unhappy events happened to your life in future, and invest the balance money in those financial instruments have the potential to provide an inflation adjusted reasonable return.  
Investment in Precious Metals - It is a good strategy to invest a small portion of your investable fund in precious metals like Gold.   It is proved that, gold has high potential to beat the inflation or  hedge against inflation.  This is traditionally followed in India, especially where there are girl children, to keep on investing in commodities like Gold and Silver etc. In the present situation, where commodities might be growing at a better rate and also to beat the inflation, this is a good strategy.  It is not recommend to invest in gold ornaments ( you will lose lot of money when you convert this), instead of this one should buy gold in the form of Gold Biscuits or Coins.  Again keeping gold in physical form has got lot of disadvantages and inconvenience especially safe keeping, safe deposit locker charges, quality of the commodity etc.  It is recommend buying gold or precious metals in E-format (E-gold) form stock exchange or ETF (Exchange Traded Fund).  E-gold/ETF even you can buy 1 gram of gold.   Even if you have little amount you can buy and accumulate gold for the future needs of your children
Investment in Guaranteed and Government Sponsored Schemes like PPF, NSC, Post Office MIS etc - There are dual benefits in investing in these schemes, first one the parent get income tax benefits other one is interest income and capital is guaranteed but as per the recent Government Notification, the interest rates of all Small Savings Schemes will be linked to G-Sec (Government Securities) and rates and varies every year. 
Bank Term Deposits – Now a day's its better option, you will be able get an annual interest ranging 8.50- 10%.  Better try to lock the deposit for longer period. Government is expected that, the coming months, the inflation will come down.  Once RBI reduces the bank rates, automatically the FD rates also will come down.
  However success to any financial plan always depends on one's ability to adopt stringent financial discipline, proper asset allocation, periodical review and rebalancing of the portfolio etc.  In case you are not experienced enough; please take the help of an expert financial planner for guidance
Best Regards
Prakash Nair, LLB, CAIIB, CA(inter), DMFM, NCFM, CME-1

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