Costs can escalate suddenly. Prepare in advance, or be ready to prune expenses.
Education has become one of the most expensive and constant parts of Vandana Pathak’s monthly budget. She has to set aside Rs 10,000 a month for her brother, a Class VII student in Mumbai. This has been rising steadily.
A couple of years ago, Pathak used to spend up to Rs 8,000 a month on her brother’s education. “And, I would soon be putting Rs 15,000 aside once he goes to higher classes,” she said. This may not be news for many.
It’s a fact that a child in the crucial classes — IX, X, XII — has many other expenses apart from the usual ones on school, transportation, uniform and books. Most students need extra classes. The costs, as Pathak points out, can be upwards of Rs 1,500-2,000 a month, for each subject.
Additional reference books and mock test papers cost between Rs 500 and Rs 1,500, or even more at times. Special scholarship tests to prepare well for exams may require a parent/guardian to shell out another Rs 500-1,000. Then, there are the competitive exams — engineering, medical, etc — that need preparation from the school stage itself. This would mean an expense of Rs 10,000-12,000.
In total, you may need to arrange for upwards of Rs 10,000 per month, perhaps much more, to help your child beat the rat race. Add to this the usual school expenses of Rs 3,000-5,000 a month and the total outgo can easily exceed Rs 15,000 each month.
It’s no wonder, then, that many insurance companies market savings schemes for children. But the insurance aspect is not very high. So, the big question is: How does one accumulate the vast sums required and not leave it on the expected cash flows?
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Early bird (more than 10 yrs left)
Once you know the time at hand and calculate the amount required, to be on the safe side and inflate the required amount by 10 per cent annually.
Look at equities for such a long time period. The options are stocks and equity mutual funds. Direct stock investment is not advisable for retail investors. Instead, opt for an equity diversified fund. The investment could be in lump sum or by way of a systematic investment plan (SIP).
Experts advise investing Rs 5-10 lakh in lump sum, or Rs 5,000-10,000 through an SIP. Transcend Consulting Director Kartik Jhaveri said, “Extra deployment always helps later. And, 10 years from now, you could need up to Rs 1 crore for a decent education.”
According to the mutual fund rating agency, Value Research, equity diversified funds have given almost 42 per cent return over a one-year period (as on July 14). Closer to the goal (one-two years away), you can slowly shift the money from equity to debt for assured returns and to avoid capital erosion due to market risks.
For every 10 per cent rise in salary, you should increase your investment allocation by a minimum of two-three per cent, say experts.
Realisation dawns a bit late (four to five yrs left)
Say, you had other priorities earlier, like taking care of aging parents or siblings’ education/marriage, and you could not save for your child’s future. And you wish to start today — around four-five years away from the goal.
A four-to-five years’ time span is long and equity is the place to invest. If you wish for high returns, choose equity diversified funds. Some may be a bit more aggressive and look at sector funds as well, but remember to exit at the right time. You might need professional help to manage an aggressive portfolio.
But if you wish for high returns with some safety, balanced funds could help. Balanced funds invest up to 60 per cent in equities and the rest in debt, to give high returns while protecting the invested money from downsides. According to Value Research, balanced funds have returned almost 30 per cent in a year.
Alternatively, you could also build your own portfolio with 70 per cent in largecap funds, 20-25 per cent in debt and the remaining in midcap funds for quick returns — but this is optional. As you approach your goal, gradually shift all the money from equity to debt.
‘Oh no, I am too late’
It can happen that your planning goes haywire, at the eleventh hour. It could be a medical emergency, a market crash, etc, and you had to dip into the education kitty — withdrawing more than required. “Make up by contributing a majority of your salary towards it. Cut on discretionary expenses and/or postponing expensive purchases, like car, house and so on,” said Pankaj Mathpal, a certified financial planner. Yes, that small personal loan can help. But go for it only if you aren’t burdened with other loans.