For parents, quality education for their children is paramount. It is one of the most crucial goals, and all parents wish to provide the best possible education to secure their child's future. However, education, particularly after 10+2, is a costly affair.

Education inflation is going up at a fast clip and stands anywhere between 11 to 12%. It is different from retail inflation and a higher education course, which currently costs Rs. 10 lakhs, could cost well above Rs. 31 lakhs, ten years down the line. The cost is even higher if your child decides to pursue it abroad.

Therefore, it’s vital for you, as a parent, to start planning and building a corpus for your child’s higher education so that funds are not a paucity going forward.

Starting Early: The Key to Success

It is evident that you require a lot of money for your child’s higher education. Hence, it’s vital to start early to accumulate funds for the same. Understand that higher education is a non-negotiable goal. It means you can’t defer it. Children start applying for colleges and courses once they complete their 10+2, generally aged 18.

While some may take a couple of years to prepare, the application for admission, on most occasions, starts when your child is 20. Therefore, you have a finite number of years to plan and build the desired corpus.

So, an early beginning is desirable as it gives you more time. Each lapse year will only make the task difficult for you. Get started as soon as your child is born so that you have the luxury of time. Also, starting early gives you the flexibility for course correction should the need arise.

Invest in Equities to Gain Inflation-beating Returns

To accumulate the desired corpus, you must start investing in equities. This is because they, as an asset class, have the potential to deliver inflation-beating returns in the long run. A good way to dabble in equities to create higher education funds is through systematic investment plans (SIPs) in mutual funds. SIPs allow you to start small and help you stay invested across market cycles, highly essential for wealth creation.

Suppose you want to accumulate a corpus of Rs. 50 lakhs in 15 years, a monthly SIP of a little over Rs. 10,000 in a fund offering annualised returns of 12% can help you achieve your target. As said, the earlier you start, the better it is as you get to benefit from the power of compounding.

Compounding touted as the ‘eighth wonder of the world’ by Albert Einstein significantly adds to your corpus. If you delay, then you need to shell out a higher amount (as shown in the table below), and you might end up stretching your finances.

So, it’s prudent to start early and remain committed to your investments. Equities are volatile in the short-term. However, adopting a long-term approach brings down the quantum of volatility significantly.

Slowly Shift to Debt As the Goal Nears

While aggressive investment in equities can help you accumulate the desired funds, it’s equally essential to protect the gains from eroding due to market swings. Therefore, it is advisable to move the corpus to debt as the goal nears.

For example, when your child has just 2 to 3 years left for higher studies, slowly start withdrawing the corpus from equities and deploy in debt instruments such as debt funds or bank fixed deposit, for that matter. You can contemplate systematic withdrawal plan (SWP) in mutual funds whereby a certain amount is withdrawn from the equity fund and invested in the debt scheme of the same AMC.

Shifting to debt funds and even bank fixed deposits also help you gain some returns that boost the overall corpus. While the former offers variable returns, the latter gives fixed returns.

Important Things to Keep in Mind

Be Disciplined

You must adopt a disciplined approach in this crucial exercise and keep investing regularly. Particularly, if you are investing in equities to build the desired corpus, you should be patient and not get deterred by short-term volatility. If you exit midway, you can fall short of the targeted amount.

If you are investing in direct stocks, pick up fundamentally-robust companies with sound balance sheets and corporate governance models. Avoid random picks, and it’s better to stay with large-cap stocks as they are stable and provide decent returns in the long term.

Monitor Your Investment

You must monitor your investment regularly to ensure you are on track. Keep an eye on education inflation figures and finetune your investment accordingly. Note that higher education not only entails tuition fees but a whole lot of ancillary expenses such as accommodation, food, books, exam fees, travel, etc.

So, you need to count them while fixing the target and analyse your investments periodically to make sure it aligns with your objectives.

Don’t Divert Funds for Discretionary Needs

This is an essential goal, and therefore you must ensure to use the funds for actual needs and not divert them for non-essential expenses. If you do so, this can prove to be highly counter-productive. Build a separate budget for such expenses.

Many make the cardinal mistake of diverting this fund for addressing non-essential needs. In the end, they fall short of the corpus. Also, doing so robs compounding from weaving its magic.

Loop Other Family Members

Ensure your family members are aware of the corpus and the way to access it. In case of your absence, they should know how to build on the existing funds and withdraw the same, if required. Therefore, you must not make the decision in isolation and involve family members in it, particularly your spouse.

The Bottomline

Meticulous planning coupled with prudent investments goes a long way in ensuring funds are not a roadblock in providing the best higher education to your child. You can bridge the shortfall with the help of an education loan. However, a bigger corpus ensures that you don’t need to avail of a large loan amount and can fulfill your child's dreams hassle-free.

Source: Malayalam Manorama