How to create a roadmap for funding your child's higher education

Begin with a 100 per cent equity portfolio, which you can reduce gradually as the goal approaches

Welcoming a new member into your family is a joyous occasion, but it also marks the beginning of serious financial planning for the future. Starting investments early for your child’s education can ease financial pressures down the road. To help you navigate this long road, we provide some useful pointers on how to manage your finances so that you have the right amount available at the right time. The key, as always, is choosing the right instruments.

 

Debt investments 

Public Provident Fund (PPF): Opening a PPF account for your child is an excellent long-term move. PPF offers tax-exempt interest and maturity proceeds, making it a reliable fixed-income product. 

The PPF account is not meant for your child’s retirement savings. Opening it early ensures the countdown to the 15-year maturity period starts early. PPF becomes extremely flexible after the initial maturity period of 15 years. 

You can then extend the account in 5-year blocks (with or without contribution) any number of times, and make withdrawals with fewer restrictions. This means a PPF account can be continued for life. After the initial maturity of 15 years, the restrictions on withdrawals also go down drastically.  If needed, this money can be easily used for children’s education too. 

Maximise contribution to your own PPF account (for your own retirement). At the same time, keep making a small contribution to your kid’s account. PPF account is also a good place to route the gift money children get from their relatives on birthdays, festivals, and other occasions. 

Remember the cumulative limit of  Rs. 1.5 lakh in a financial year across all PPF accounts—yours and those where you are the guardian.

 

Sukanya Samriddhi Yojana (SSY): An SSY account is another excellent option for those who have a daughter. The account matures 21 years after opening. Full withdrawal is permissible only at the time of marriage. Partial withdrawal up to 50 per cent is allowed for higher education. This makes it restrictive if you need the money for your daughter’s higher education. Unlike PPF, SSY accounts cannot continue indefinitely, limiting its flexibility.

 

National Pension Scheme (NPS) Vatsalya: This minor-focused retirement product allows tax-free compounding and rebalancing. But it is unsuitable for a child’s education due to the restrictions on withdrawal.

 

You may also consider recurring deposits, fixed deposits, or debt funds, but be mindful of the adverse tax regime.

 

Equity mutual funds or stocks

 

If your child is less than five years old, you have 10–12 years to invest in growth assets like mutual funds or stocks for higher returns. Start a Systematic Investment Plan (SIP) in a low-cost mutual fund, ignore market noise and keep accumulating. You can only make these investments if you have the risk appetite for equities.

Select products that match your risk profile. If you cannot stomach the volatility of equity products, consider hybrid funds.

Mutual funds spread risk across multiple stocks, reducing the volatility compared to direct investments in a few stocks.

 

Gold investments

 

You may also invest in gold for portfolio diversification. Opt for Sovereign Gold Bonds (though purchasing them has become complicated of late), gold ETFs, or mutual funds instead of physical gold or jewellery, which incur making charges.

 

Determining the right investment amount

 

Start with clear financial goals. For instance, if you start a monthly SIP of  Rs. 1,000 at an annual return of 12 per cent, you will accumulate  Rs. 5 lakh in 15 years. If the required corpus is  Rs. 25 lakh, your current investment covers only 20 per cent of the need. It is important to not just invest, but to invest adequately. Use tools like Microsoft Excel to calculate the required monthly or yearly contributions, accounting for inflation.

Do note that investments (except PPF and SSY) can be in your name and earmarked for your child’s education.

 

Asset allocation strategy

 

Begin with aggressive investments in equities for this long-term goal, then gradually reduce equity exposure as the goal approaches. For instance, if your child’s education is 15 years away, start with 100 per cent equity allocation, transitioning to a mix like 75:25 (equity:debt) at 10 years, and 50:50 at 5 years, and then reduce equity exposure by 10 per cent each year.

 

Avoid insurance-linked savings plans

 

Life insurance products, such as Unit-Linked Insurance Plans (ULIPs) and traditional policies, are often marketed for child education savings. ULIPs offer market-linked returns, while traditional plans (non-linked, participating and non-participating) offer debt-like returns.  However, these are costly, inflexible, and difficult to exit prematurely. Ulips come with a five-year lock-in. Traditional plans impose a heavy penalty in case of premature exit.  

 

These insurance plans, however, have one use case. Suppose you want to invest Rs. 1 lakh per annum for your daughter’s education for the next 15 years. You want this investment to continue even if you are not around. Such solutions would require an insurance component. Pure play investment products such as mutual funds, PPF, SSY etc. cannot offer such a solution. Ulips and traditional plans can structure such solutions. They may be expensive and sub-optimal but offer you peace of mind.

 

Review your life insurance

 

Adequate term insurance is essential to safeguard your family’s financial goals. With the birth of a child, increase your coverage. Keep revising the amount of coverage periodically as your responsibilities and liabilities (like loans) increase. 

Blueprint for securing your child’s higher education dream

Set clear financial goals; calculate required contributions using tools like Microsoft Excel

Begin with aggressive equity investments, reducing equity exposure as the goal approaches: 100 per cent equity initially, reducing to 75 per cent at 10 years, 50 per cent at 5 years, and further reductions closer to the goal

On the debt side, you may use PPF

Avoid insurance-linked savings plans as they are costly, inflexible, and difficult to exit prematurely

These plans can be considered if an insurance component is required to ensure investments continue after the investor’s demise

Adequate term insurance is crucial to safeguard financial goals and cover liabilities

  (The writer is a Sebi Registered Investment Advisor. This post is for educational purposes alone and is not investment advice.)