Most of us would put our children's education above any other priority in life including, our own retirement. Planning, therefore, is imperative and should begin as early as possible.
With so many products and opportunities available in the market, a whole lot of emotive advertising and innovative products hitting the market every day, it's very easy to get it wrong.
So, let's try to find the best solution.
Step 1: How much would you need and when?
Let's assume you are 30 years and have become a parent recently. Also, assuming that the cost of higher/professional education you desire for your child is about Rs 900,000 at current value.
Since he will enter college at 18, you need to start planning for 18 years later. Since education costs increase faster then inflation, it is safe to assume an increase of 10 per cent per annum. Based on these numbers, you would need Rs 50 lakh (Rs 5 million) after 18 years.
Step 2: Which asset class should I choose - fixed income, real estate or equities?
Let's look at all of them and select the most suited one.
Fixed income investments like public provident fund, National Savings Certificates, fixed deposits, fixed maturity plans etc are the safest form of investment but they give poor returns after adjusting for inflation and taxes.
| COST OF EDUCATION | |||
| For investment(Rs) | For Insurance (rs) | Total (Rs) | |
| Diversified Equity Fund | 11,146 | 282 | 11,428 |
| ICICI Child Plan | 11,000 | - | 11,000 |
| ETF Index Fund � Nifty | 9250 | 282 | 9532 |
Real estate could give good returns but it needs to be ruled out because of high initial capital requirement and high entry/exit costs.
This leaves us with equities. It scores over others in more ways than one. Among others, there is scope for diversification, low investment risk if the horizon is long, good inflation adjusted returns and of course, easy liquidity.
Step 3: Now that we have decided on equities, what are our options?
They are:
- Direct investments
- Diversified mutual funds
- Exchange trade funds (the Nifty index fund)
- Education plan through an insurance company
Direct investment in shares could be very dangerous if you are not an expert. The other three are managed by professional money managers. So let us analyse them in detail.
Assume a very safe return of 10 per cent over the next 18 years in all the three options -diversified funds, exchange traded funds as well as child plans.
As far as the cost goes, you can see that the entry load is the maximum in case of the insurance cum investment plan. It is the minimum in case of the ETF tracking the Nifty. Asset management fees are the highest for diversified funds and lowest for the ETF. (See Entry and Management costs)
| ENTRY AND MANAGEMENT COSTS | ||
| One time entry load/ allocation charge | Annual Asset Management Fees | |
| Diversified Equity Fund | 2.25% | 2.00% |
| ETF Index Fund - Nifty | 0.00% | 0.50% |
| "ICICI Child Plan" | "1st yr - 18% | 1.50% |
| Asset Management Fees taken above are either quoted in their marketing material or are an approx based on the products available in the market. They may change at the discretion of the companies subject to approval from concerned authorities. | ||
Based on the above charges and expected return of 10 per cent, to reach Rs 50 lakh in 18 years, you would need to invest about Rs 11,150 in a diversified equity fund, or Rs 11,000 in a child plan or Rs 9250 in the ETF.
Besides putting this money aside every month for your child's education, there is another important factor one must not forget. What if something unfortunate was to happen to you tomorrow? Since there won't be anyone else to pay for the education, your investments will not be able to generate the target of Rs 50 lakh.
To guard against this uncertainty you must buy a pure term insurance on your life. The amount of insurance should be adequate enough to generate Rs 50 lakh in 18 years would be Rs 13-14 lakh (rs 1.3-1.4 million), assuming that the entire corpus is invested in the ETF in case of your unfortunate death. A 30-year old can get a term policy from SBI Life Insurance of Rs 14 lakh (Rs 1.4 million) cover for 18 years at just Rs 282 per month!
Since the child plan already has insurance built into it, we have to consider this additional payment for others. So our total outgo per month would be Rs 11,428 for diversified, Rs 11,000 for the child plan and Rs 9532 for the ETF index plan.
As you can see, the ETF index fund with term insurance is the best option. It's about Rs 1500 cheaper. Moreover, you could increase or decrease your investments into ETF any time you like, depending on your situation. At 30, putting even this Rs 9,500 aside per month could be a stretch for many of us.
So you could plough in lower amounts in earlier years and increase them gradually, For example, you could pay Rs 282 per month for insurance and the ETF investments could be:
- Rs 6,000 per month for the first four years
- Rs 8,000 for the next four years
- Rs 11,000 in the next four years and Rs 16,000 in the remaining six years and still reach our goal of Rs 50 lakhs
As we can see that whichever way you may look at it, the ETF combined with the cheapest term insurance on your life, is the best way to plan of one's child's future.
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