Child's Education--Delay will be Very Costly

It is human nature that we strive to meet immediate financial needs and postpone the one which are still some years away. Impact of postponing a future need—how so ever important—will ultimately prove to be expensive/costly—both financially and psychologically—is something we do not give a second thought to.

When the day of reckoning arrives—we blame everybody but ourselves. For example, milestones like children’s education or our own retirement are events we do not seriously think about as they are future needs. The fact that you should think about retirement as soon as you start working is more often than not given a miss. “It’s too early to think about retirement” is the most common phrase we hear when we talk about retirement to our clients.  Most people start looking for funding when their children are very close to their higher studies. The hard truth is that you don’t have much choice when it comes to your child’s education. No parent in this world likes to compromise on their children education—and if they follow a disciplined approach to building a corpus, they need not compromise. In absence of shortfall in funding, the difference is usually made by transferring funds from the retirement corpus (PF/EPF Gratuity etc.)

Even if you postpone the planning for your child’s education by 5 years, then be ready to shell out double the amount to accumulate the desired corpus within a definite time frame. Consider this:-

·     If you have 15 years to plan for your child’s future, you should save Rs. 57,000 a year or Rs. 4,800 a month.

·     If you have 10 years in hand, you need to save Rs. 1.20 lacs (Rs. 10,000 per month) to accumulate the same corpus.

·     However, if you have only 5 years to accumulate the desired corpus, then be prepared  to shell out Rs. 3.35 lacs a year(Rs. 28,000 per month) (See table below)

	Corpus	Time to goal	Asset Allocation	D/E Ratio	Expected Returns	Annual Savings (Rs)
Child 1	Rs. 20 lacs	5 years	Bond Fund/Large Cap Equity	80:20	8.80%	3,35,519.00
Child 1	Rs. 20 lacs	10 years	Bond Fund/Large Cap Equity	35:65	10.60%	1,22,000.00
Child 1	Rs. 20 lacs	15 years	Bond Fund/Large Cap Equity	20:80	11.20%	57,200.00

Less time on hand implies that you cannot take risk and hence you have to invest in securities which are safe and thereby compromising on returns. (Read Virtues of Long Term)

Less time also restricts the choice of options available to plan for desired corpus for a milestone as important as your child’s education.

Asset allocation plays a very important role in any investment strategy. The success or failure of an investment strategy depends on the asset allocation one adopts. It is often said that a successful investment strategy is 10% timing and 90% proper asset allocation.

If the asset allocation is skewed in favour of fixed interest securities (bank FDs etc.), chances are that you will fall short of target corpus (since inflation nibbles away a part of your meager returns). If however, the asset allocation is biased towards equity, then a crash in equity markets near to your deadline mazy force you to postpone your encashment or make good the shortfall from other sources.

For the purpose of calculations, we have assumed that bond funds will return 8%CAGR (net of tax), while equity funds will return 12% CAGR (net of tax).  For the debt portion, we advise bond funds as they give better tax adjusted returns as compared to other fixed interest securities. (Debt funds have the benefit of indexation benefit if held over a year).

The debt to equity ratio of 80:20 for 5 year time horizon should be changed in favour of equities to 35:65 or 20:80 as over long term, equities always delivers superb returns.

Parents have an affinity to buy insurance policy for children under the impression of securing their future. Insurance plans have an embedded cost structure which will reduce the overall returns. On the other hand mutual funds (both debt and equity) are better placed to offer market linked returns, with far lower costs in built into them. We at AIMS, have always favoured either surrendering your child insurance plans or make them paid up after consulting your financial planner.

Either make an informed decision yourself, or call on us to assist you in arriving at one---today