How to plan and invest for your child's higher education

Parents are determined to give their children the best. There is no better investment than education. In today's competitive world, the best education in premier institutes or universities can set your child apart. A premier institute or university can serve as a milestone in your child's career. How to plan and invest for your child's higher education is what this article talks about.

When you plan to save and invest money, the process becomes simpler.  

Many parents want nowadays that their child should get education in the premier institute and demanding courses such as Doctors, MBA etc. Despite higher costs, parents are even considering foreign education for their children. Lack of money for children’s higher education can spoil their dreams & parents need to plan in advance to avoid this. Education abroad or with premier institutes in India is not cheap and parents need to save and invest in order to accumulate enough money and not to depend on funds by students loans or other means. 

Fix your time horizon

The first and important thing is fixing the time horizon. Calculate the years or period to your child's graduation and post-graduation. You can decide the time horizon with the approximate number of years in mind. 

A longer time horizon is better for you to plan & invest. It also benefits in a way that we get extra time to fix errors or losses due to our wrong decisions. Start investing for this goal at the earliest. With time on your side, you can see the power of compounding play its role.

Need of a separate higher education saving & investing for children

Savings funds can be divided into two parts – Optional and essential. Optional (less priority) savings funds are the ones driven by a goal that can be optional or we can say a 'wish'. These wishes could be a particular car, second house, your bucket list vacation, electronic gadget, etc.

Essential savings funds are for goals that are unavoidable. These include your emergency fund, your retirement corpus, and child's higher education fund, etc.

Simply said, you can postpone the optional goals without much of an effect on your family’s well-being, but that isn’t a possibility with the goals of your essential funds.

How do you set a goal amount for higher education?

Parents often have this question in their mind, "how to set a goal amount for a child's higher education?". List down the best opportunities for your child. Check the current cost of those opportunities with respect to the institute, course, university, location (India or abroad, same state or different state). For example, approximate tuition fees in UK & Europe are in the range of 5 to 25 Lakh, in US these are in 5 to 50 Lakh while in Australia 5 to 15 Lakh. In addition, we also have to consider living expenses, books & stationary, Food, Health insurance, Travel etc. along with adjustments for inflation. Expert Financial planner or advisor can also help you calculate the goal amount.

Once you have the goal amount and time horizon is with you half of the efforts are done.

Education inflation

Education inflation is the rise in the cost of education over time. As per trend generally, education inflation is significantly more than household inflation in many countries. It would be smart to target an amount a little higher than the inflation-adjusted target cost.

A great example of this could be that nowadays kindergarten fees are around 1 lakh to 2 lakh. A decade ago people did their whole Engineering Graduation at this cost.

Exchange Rate

Exchange rates are another important factor that comes into the picture when you want to send your child to study abroad. The value of the rupee has gone down over the past few decades and if the trend continues, The cost of studying abroad is going to increase more than the inflation-adjusted rate. 

Diversification in Investment

To minimize risk and maximize returns, the best way is to diversify your investment. Remember that the diversification should be aligned with your age and risk profile. Put your eggs in a different basket. Invest in Stocks, Mutual funds, FDs, Gold, etc.

The best investment avenues

In all investment avenues, Mutual funds can be considered as the best way to save and invest for a child's education. Mutual Funds are a little riskier compared to fixed deposits but have the potential to deliver great returns beating inflation to reach your goal. These schemes are run by experienced Fund managers who have spent most of their careers in the world of finance. They work with a team whose only goal is to deliver high returns. To add to their credibility, there are top names in banking who run their own mutual funds and have delivered consistent returns for decades under regulations of SEBI.

Having an investment horizon of at least 10 years will benefit you with Rupee cost averaging and compounding to help achieve the target amount. The monthly systematic investment plan (SIP) amount should be such that your equity investment grows to achieve the target amount beating the taxes & inflation in a given time horizon. As you get closer to needing the funds, move the corpus to a debt fund or FD to safeguard the capital. 

Investing in mutual funds for your children’s higher education could deliver returns that beat inflation with lesser risk than a direct jump into the stock markets. You can either go though by yourself investing 'direct' or go through Mutual Fund Distributor investing with 'Regular' option. Investing with Mutual Fund Distributor has its own benefits like convenience, help in financial planning, setting goals, MF portfolio management etc.

What if my calculation gets wrong or if you couldn't achieve your goal amount?

If your calculation gets wrong and you couldn't achieve the goal amount despite your efforts, there are affordable education loans that can help you with your remaining needs. Since you already have done most of the work by saving and investing wisely, the remaining needed amount will not be an issue for you.

Advice to young parents

The main factor for young parents is 'time'. Start early, start right away for investment. Discipline and good financial habits can help you reach all your goals ensuring you give the best opportunities to your children. A university degree can provide your children with a platform that can catapult their careers to new highs. For parents, I believe that’s an investment worth far more than anything.