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Having the right educational opportunities is a key part of ensuring that your child stays on track to achieve his or her career dreams. But to make this happen, parents need to plan ahead and start building a dedicated child education corpus as early as possible. This corpus can help ensure that a shortage of funds does impact the future education needs of the child. Let’s see how child education planning can help achieve the goal of building a child education corpus.
Key Steps in Building the Child Education Corpus
Like all financial plans, there are some key factors to consider when you are attempting to save for your child’s future education expenses. While the steps mentioned below do not guaranteed success, but they will definitely increase the probability that you will reach the goal of creating a corpus of adequate size.
Estimate the Future Cost
The very first step of this process to set a corpus size target. To estimate how much your child’s higher education will cost, you will need to factor in the impact of inflation. In the past decade, the cost of higher education in India has on average increased by around 10% p.a. This means that a course fee of ₹15 lakh in 2016 has increased to about ₹39 lakh in 2026. This inflation in the cost of education is also applicable to those targeting overseas courses.
Depending upon your child’s current age, you can estimate the cost of their chosen course using an inflation calculator. So, if the current age of your child is 10 years and assuming the age of starting higher education is 18 years, you have to estimate the cost of education 8 years down the line. Your overall child education planning strategy should consider this number to be the minimum corpus amount you should achieve. This way, if you end up with an amount that is higher than what is actually needed, you can always use the excess funds for other purposes.
Choose Investment Options Wisely
The choice of investments that you make will primarily be influenced by two key factors - how soon you need the corpus to pay for your child’s higher education and your risk appetite. If the corpus is needed within the next 5 years, you will need to consider less volatile investment options such as debt instruments and debt-oriented hybrid schemes. These are potentially less volatile compared to equities. So, these debt-oriented investments may be suitable for parents with lower risk appetite.
On the other hand, if your child is relatively young and you have the benefit of staying invested for 7+ years, equity investments should definitely be considered. Equities tend to quite volatile in the short-term, however, over the long term this asset class has the greatest potential to deliver inflation-beating returns. Due to their potentially high short-term volatility, equity investments may be more suitable for individuals with high risk appetite who are investing over the long term.
Make Disciplined Systematic Investments
No investment plan can succeed unless you stick to it and saving for a long-term goal such as creating an adequately large child education corpus requires a high degree of financial discipline. To stay on track and ensure regular savings, consider making systematic investments into investment plans of your choice. Making systematic investments offers 2 key benefits - consistent savings over time that do not stress your monthly budget and rupee cost averaging.
Rupee cost averaging is especially beneficial if you are investing in market-linked instruments, as it eliminates the need to time markets. That said, ensuring consistent savings while staying within your means is no less important. Another aspect to consider is automating your investments by setting up bank/UPI mandates. Automating investments is essential to ensure you do not miss any scheduled investments and your money gets deducted from your account automatically, so there is less chance that you might end up spending on something else. This can help maintain long-term financial discipline, which is vital when you are attempting to reach a long-term goal such as creating a child education corpus.
Ensure Appropriate Asset Allocation and Periodic Rebalancing
As already mentioned, some investments are better suited for achieving long-term financial goals compared to others. But, it is not advisable to invest in only a single type of investment as it can lead to higher concentration risk that can have adverse impact on your portfolio’s performance. So, you should consider allocating funds across multiple investments and asset classes to minimise concentration risk. The exact allocation will vary from one individual to another as risk appetite and personal preferences differ from one individual to another.
Even if you have diversified your investments wisely, you always need to consider the potential impact of changing market conditions. A variety of factors such as interest rate updates, bond yields, equity market corrections, etc. can impact the performance of your investment portfolio. One way to manage the impact of such changes is to periodically check the performance of your investments and rebalance your portfolio accordingly.
For instance when equity markets are undergoing correction, you may consider increasing your overall equity allocation so that you can take advantage of cheaper valuations. This way, when these equities stabilise later on, your equity investments would give the child education corpus a boost and help you get closer to your target.
Key Investment Options for Creating a Child Education Corpus
In broad terms, investment options that can be used to create an adequate child education corpus can be classified into 2 broad categories - market-linked options and fixed return options. Below are a few fixed returns investment options that you should consider incorporating into your child education planning portfolio:
Fixed Return Investment Options
| Investment Options | Suitability |
|---|---|
| Guaranteed Child Plans | Preferred by conservative investors seeking a safe investment option that offers assured returns |
| Sukanya Samriddi Yojana | Preferred by conservative investors who want the safety of sovereign guarantee and are saving specifically for their girl child’s higher education and marriage. |
| Public Provident Fund | Preferred by traditional savers who are seeking to invest long-term, get assured tax-free returns with no risk to their capital |
| Fixed Deposit | Preferred by individuals who seek the flexibility to change investment amount periodically while receiving assured returns |
Among all the above options, only FD returns are fully taxable at maturity, so some might consider them to be the least preferable. However, FDs do offer a higher flexibility as they do not have the long lock-in period that is applicable to the other fixed-return options.
Market-Linked Investment Options
Now, let’s look at some popular market-linked options that you can opt for when creating a child education corpus:
| Investment Plan | Suitability |
|---|---|
| Direct Equity Investments and Equity Funds | Preferred by individuals with high risk appetite who are seeking inflation-beating long term returns |
| Debt Funds | May be suitable for individuals seeking higher level of liquidity and lower level of volatility while making market-linked investments |
| Market-Linked Child Plans | Preferred by individuals seeking protection of their child’s future through life cover benefit along with market-linked growth of their investments |
| Hybrid Funds | Preferred by individuals who want to invest in a single solution that combines the benefit of equity-based long term growth along with the potentially higher liquidity as well as lower volatility offered by debt investments |
It is notable that returns from all the above investments are subject to capital gains tax rules. So do consider the tax implication of your chosen investment as it can impact the net returns you will receive at maturity.
Precious Metal Investments as a Hedging Instrument
One more factor to consider is the use of hedging instruments such as gold and silver investments. Currently there are a wide variety of investments to choose from, such as, gold ETFs, silver ETFs, gold mutual funds, digital gold, etc. The performance of these investments are impacted by changes in the price of the underlying asset - gold or silver. Precious metal-based investments are considered a safe haven that have the potential of maintaining their value in the face of inflation as well as during periods of economic/political turmoil.
But, do keep in mind these should only comprise a relatively smaller portion of your child education corpus with either equity or debt instruments forming the major portion of the overall portfolio. So, do ensure appropriate asset allocation depending on your time horizon and risk appetite. If required, take the help of a financial advisor to figure out the appropriate asset allocation that is customised as per your unique needs.
Some Key Things to Keep in Mind When Building a Child Education Corpus
- Do not underestimate the impact of inflation. This is a key factor that influences the size of the education corpus you should plan to reach. It is always better to overestimate the impact of inflation. This way you might end up with a larger corpus than required, which is definitely better than falling short of your goal.
- Include protection plans in your overall child education planning strategy. Investments are important to reach your target corpus but what if you are no longer around to care for your child financially? To mitigate this risk, consider incorporating protection plans such as a term insurance plan that add an additional layer of financial security. Alternatively, you can opt for a child education plan that combines the benefit of life cover with long-term investment returns.
- Consider reducing equity allocation when you are closer to your goal. As you get closer to your goal, it is recommended that move a portion of your portfolio into lower volatility instruments such as FDs and debt mutual funds. This will help you preserve the capital that you have previously created. This way your gains over time are not adversely impacted by the potential volatility of equities as you get closer to your goal.
- Be realistic. Parents might have the best intentions, but it is not unusual for them to have and set themselves unrealistic targets. Do not forget to consider your current financial situation when setting your child education corpus target. Without having a realistic goal, you will just set yourself up for failure.
One final thing to consider. While your child’s education is important, saving for your child’s education should not come at the cost of other mandatory long-term goals such as saving for your retirement. You need to figure out an appropriate balance between child education planning needs and achieving other investment goals so that your child’s future needs do not come at the cost of other goals such as your post-retirement financial security.
