How to plan for Child Education Fund?

 

Child Education is a prime responsibility of a parent as it not only educate a child but also evolve the overall development of the child in terms of learning, personality, health etc.

In today’s time, every parent is trying hard to get the best education for his/her child. So they approach to best schools/colleges. But If these institutions are governed by the private bodies, then obviously their course fees would be high enough to burn a hole in their pocket. Also, there is an interesting fact, annual fee inflation in private college somehow doesn’t correlate to no matter how high retail inflation there is. On the other hand, if you plan education abroad for your child. It’s even costlier as compared to our country.

Graph below shows how school fees are skyrocketing in comparison with CPI and Wages. It even shows how unfair it is getting as wages growth is not catching with fees. Also seeing the fees growth, I have a feeling school is a great business to start :

 

 

If we talk about the Engineering and MBBS degree, the education inflation in India is increasing on an average of 11% annually.

 

 

 

 

How education fees abroad have been growing linearly over the period of the 40-years.

 

Taking fee inflation into consideration, parents should be aware of the rise in the fees structure of the degree courses in coming years. So there should be a proper financial planning to tackle these challenges in coming future and give the best education for your child. We are here to help.

One can find the below points to decide what amount he/she can invest over the long term to fulfill its child education expenses goal.

Decide the total amount:

In general, before investing in any mutual fund schemes one have to decide the goal: cost. Every goal has the cost which is to be fulfilled over the period of time.

Goal value assessment is dependent on the below factors:

  1. Current Value of Goal – If you are planning to get your child in the Engineering, MBBS or anything else. First, decide the current cost of the course.
  2. The rate of Inflation – There is a 11% Rate of inflation in case of the educational cost can be taken into consideration. So this is the rate of your child’s fees increases every year.
  3. Goal Completion Year – When you want to complete your goal. If your child attains the age of the 16 – 17 year, you need the decent sum to fulfill your child graduation. So you can calculate the years based on the below formula:

            Goal Completion Year = Child age at the time of starting graduation – Current age of the child

  • So, if the current age of your child is 3 years, graduation age is 17 years, then Goal Completion age is 17-3 = 14 yrs
  • Another example, if you are still single, and you are already pre-planned for the child education investment, then assuming you have a child after 4 years down the line then taking above age as your child graduation age, then the goal completion year is calculated as 17-(-4) = 21 Yrs.
  1.  Calculate the sum – Now after deciding all the above parameters its time to calculate the sum required at the time the child attains the age of starting the graduation. You can follow below formula to calculate:

Goal Completion Amount = Current Value of Goal(1 + Rate of Inflation/100)(pow(Goal Completion year))

Assuming the below case as,

A father wants to invest the sum for his child X graduation. Currently, the child age is of 2 years and going to starts in 4 years of engineering at the age of the 17 years. The current per year fee of engineering college is approx 2 lakhs.

Total 4 yrs of engineering course fees = 2 lakhs * 4 yrs = 8 lakhs

Goal Completion Amount = 8,00,000(1+11/100)(pow(15))  = 38,27,672 (approx 38 lakhs)

So this is the total sum needs to be collected by the father of child X for its child education.

Decide the Amount of Investment:

Now to fulfill the above amount for child graduation how much should be the initial amount to start with. Let’s get to it. One can go with the lump sum or SIP mode of investment to collect this much of sum.

To calculate the SIP required to generate this much amount, one can invest the sum of the 7,500 per month as a SIP or can use the SIP calculator on the below link to modify its return based on its risk appetite.

SIP Calculator

The lumpsum investment required the initial sum of the 7 lakhs to fulfill the goal amount. Find the below link or check the lumpsum calculation:

Lumpsum Calculator

** 12% is the average return a mutual fund give in last 20 years.

Investment Tip:  Earlier you start, less will be the initial sum required.

Decide a Mutual Fund Scheme to Invest in:

Now its time to choose the mutual fund scheme based on the above initial sum of money to start with. Its the choice of an investor to go with the lump sum or SIP mode of investment. Scheme selection criteria should be judged carefully So that goal is achieved in stipulated time.

Below are the list of mutual funds categorize as per the time left in the child graduation or post graduation initiation :

Best Mutual Funds for Child Education
Time Left in Child’s Grad/Post Grad.Mutual Fund TypeMutual Fund Scheme
>=15 yearsSmall CapSBI Small Cap(G)/Black Rock Small Cap
>=10 to < 15 yearsMid CapMirae Asset Emerging Bluechip Fund(G)
>=7 to < 10 yearsLarge Cap/Balance Fund/Multi CapHDFC Balance Fund(G)/Kotak Standard Multicap Fund(G)

Also readWhy you should invest in mutual fund?

Suggestion:

  • Avoid chasing short-term School fees target by investing in equity-based mutual fund schemes. These are riskier in terms of returns in a short period of time. So consider investing in the child graduation and post-graduation goals as they are long-term goals, hence less risky to achieve.
  • Also, Parents whose children not very far to start with the graduation or post graduation should not consider investing in equity-based mutual fund schemes. If your child has at least 7 years left in starting graduation, then you can think of going with the equity-based scheme.

For more details for short-term investment can follow this blog. Hope it helps you.

Conclusion:

Pre-planned investment can help you in long run to fulfill your goals with ease. So decide all the goals you are aspiring for and start investing. Let me know your goals in the comment section and we will discuss how we together can help you to achieve it.

Thanks!!!

 

Financial Freedom Enthusiast

Spend 6 years in learning Stocks & Mutual funds Investment. A traveler from soul, finance is passion, Investment is hobby.

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