 "How to beat education inflation and build a large-enough college fund")
Even though India's consumer price inflation has been hovering in the 5-5.6 per cent range in the last several months, the rate of inflation in education has been significantly higher, at around 11-12 per cent, implying that education costs could double every six to seven years.
To understand the impact of education inflation, let's take an example. Consider a private engineering college that charged Rs. 1 lakh per year for tuition and fees in 2010. Now in 2022, the same college is charging Rs 3 lakh per year, representing an inflation rate of 200%. And if you are a parent who aspires to send your child overseas for studies, you need to budget not just for inflation but also for the impact of rupee depreciation of at least 4-5 per cent a year on your outgo.
Considering this, setting a goal for your child’s higher education is extremely important. Given there is uncertainty on how much one should save for diverse courses, here are some tips you can use for investing for your child's higher education.
1. Goal-based SIPs: To counteract education inflation and build a substantial corpus for your child's higher education, strategic planning is essential. Start by setting precise educational goals and estimating future costs, taking into account the rate of inflation.
"A highly effective strategy is to start a goal-based Systematic Investment Plan (SIP) in large balanced funds. These funds, which invest in a mix of equity and debt, offer growth potential while managing risk, making them suitable for long-term goals like education savings.Automating your SIP contributions ensures consistent savings growth, critical for keeping up with rising education expenses. Additionally, diversify your investment portfolio to mitigate risks and adapt to market fluctuations," said Chakravarthy V., Cofounder and Director, Prime Wealth Finserv Pvt Ltd.
2. Embrace equity-linked savings schemes (ELSS): To build a corpus, opt for equity-linked savings schemes as equity would be the right option since your horizon is about 15 years. Equities help you earn inflation-beating returns and are considered as the most suitable asset class for investing with a long-term horizon.
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For such a lengthy time period, it is best to go for a pure equity fund such as a flexi-cap fund or even a tax-saver fund (ELSS) (if you wish to claim the tax benefit from Section 80C of the Income Tax Act). "Suppose you're new to investing or haven't invested in equities before, you can start with an aggressive hybrid fund. These funds have a portion of debt allocation in them which reduces the volatility of the fund. Once you get comfortable with the ups and downs of equity, then you can move on to a flexi-cap or a tax-saving fund," according to Value Research.
3. Start investing at least 10-15 years in advance: Ideally, a person should start investing at least 10 years in advance for their children’s higher education so that the goal can be met comfortably without putting incremental stress on savings or lifestyle.
"Planning well in advance allows systematic risks to be mitigated by remaining invested, accruing a large corpus and beating inflation by a good margin.Do not make the mistake of investing in low-risk / low returns asset classes like PF, FDs and life insurance policies as they would be unable to beat education inflation in the long run. Take the help of an investment expert to plan for this goal, help calculate the inflationary cost and then channel a monthly investment in a good mutual fund so that you can comfortably take care of these expenses when the time comes," said Mayank Bhatnagar, Co-founder and COO, FinEdge.
Value Research explains this with an example: Assuming you have just 10 years to your child's education goal and target a corpus of Rs 30 lakh towards her degree and post-graduation at today's prices, the same degree would cost Rs 77.8 lakh by the time your child turns 18, assuming a 10 per cent inflation rate. That would require a monthly SIP of Rs 33,830 in a fund earning an annualised return of 12 per cent. Had you started five years before, the monthly investment needed would have been lower, at Rs 25,085.
Now, if you can make an early start, Value Research recommends that you start equal SIPs in three flexi-cap funds to see you through your goal. If you have a higher risk appetite, you can use a combination of two multi-cap and one mid-cap fund. But if you have missed the bus on an early start but still have five years to go, you can still use SIPs in hybrid funds.
4. Say yes to plain vanilla mutual funds and no to hyped-up child Ulips: Plain vanilla mutual funds selected for their track record do a far better job of getting you to your child's education goal than these hyped-up 'child' plans. "Child ULIPs from insurance companies are a no-no on three counts. They divert part of your investment towards a term cover which can be bought at much lower costs separately. They carry minimum five-year lock-in periods that prevent you from switching to a better alternative if the plan delivers poor performance. Opaque labelling and costs also make it difficult for you to compare performance across different ULIPs to choose the best plan. We don't recommend special 'child schemes' from mutual funds either as restricting yourself to such special products can entail high exit loads and mediocre returns," noted Value Research in a note.
Moreover, be sure to buy adequate term cover so that in the event of your death, your family would still receive a sufficient sum assured to meet your child's college expenses.
5. Investors should aim at picking up stocks with a low-price earnings ratio (PE ratio)
The term PE ratio is commonly used in investment decisions. Simply stated, a P/E ratio is the ratio between the market price of the share and the earning per share. The ratio tells us how many times the market price of a share is vis-a-vis its earnings. According to one view, lower the PE ratio, the lower it is for the investors, as there are chances of appreciation, and vice versa. Moreover, the risk element also increases. According to others, it is the other way around. However, there are exceptions to these rules. A PE ratio is a valuation ratio of a company's current share price as compared to its per share earnings.The higher the PE, the more you are paying for an estimated stream of earnings. Investors are usually willing to pay a higher PE for companies they judge will be growing faster than the norm, even though they do not pay those earnings out in dividends but retain them to fund future growth.
"Generally, a company with a high PE ratio is expensive as against a company with a low PE ratio, since with a high PE ratio one is paying a larger multiple than the company's earnings. Higher PE ratios are often associated with 'growth stocks' , or companies that are growing faster than the average. Investors believe that the company's earnings will be higher in the future. Usually, this yardstick is used to analyse whether a stock is undervalued, overvalued or trading at fair value. In the present market scenario, investors may pick some good low PE stocks, which have a high potential for growth," said Sonia Gupta of Bharati Vidyapeeth University in a study titled 'Investment Strategy to Beat Inflation: Critical Evaluation of PE Ratio.'
6. Diversify: Invest in Public Provident Fund (PPF) for stable returns, and harness the power of Sukanya Samriddhi Yojana for dedicated education savings for your girl child. This is a government-backed tax-free small savings scheme for the parents of a girl child. It offers an attractive interest rate of 8.2% for the January to March quarter of 2024. The principal amount that you invest is eligible for a tax deduction of up to Rs 1.5 lakh under Section 80C and the interest that it earns is also tax-free.
Adhil Shetty of Bankbazaaar recommends the following diversification across assets and regularly reviewing your portfolio to ensure the best education for your children: