Staying Ahead Of Education Inflation
While your children are younger, allocate a larger portion to equity funds. As your child approaches the age for high school or college, shift your allocation towards PPF and SSY
Even though the Indian inflation rates have dropped to almost three and a half per cent, education inflation remains around 11 to 12 per cent. This means the cost of education is doubling every six years. Add the rupee depreciation costs as well if you are looking to send your child abroad. Here’s how you can plan for your child’s education and save yourself from last minute financial burdens.
Start Early
While there is no definitive age to begin, experts suggest starting investing toward your child’s education right from their birth or shortly after. Says Soumya Sarkar, Co-Founder, Wealth Redefine - a wealth management company, “The key is to start early, allowing you to take advantage of compounding returns over time. The longer you delay, the larger the amount you'll need to invest monthly to meet the same goal, or you may end up with a lower corpus.” Spreading out your investments over time via SIPs means that you can invest smaller sums and so is more budget friendly. Starting early allows you to have a longer investment horizon, averaging out market volatility impacts.
Take a Graded Approach
On the basis of the child’s needs, divide your money into a few buckets. One for short term requirements, one for the mid term horizon of two to seven years and a third for longer term needs. For those of you that have more than one child, diversify your investments so that more liquid instruments allow you to take care of one child’s immediate needs without needing to touch the longer term investments made for the other child’s needs.
Says Sarkar, “You could adopt a strategy of laddering your investments, where you allocate funds to different instruments depending on the child's age. The more kids you have, the more important it is to maintain diversification—spreading investments across equity, debt, and hybrid options to balance returns and risks.” As your income rises over time gradually increase your investments to the education fund so that you can get the corpus ready early.
How Should You Diversify Your Investments?
While safety is important, investing too conservatively may not give you the returns to keep pace with inflation. Says Thomas Stephen, Associate Director, Anand Rathi Shares and Stock Brokers, “Investing only in low-risk instruments without considering a balanced risk-reward approach can impede the growth of your education fund. Investing in equity mutual funds offers higher returns often outpacing inflation.”
While your children are younger, allocate a larger portion to equity funds. To reduce the risk, you can explore index funds. As your child approaches the age for high school or college, where you are likely going to need the funds, shift your allocation towards PPF, SSY and other such debt funds. This approach ensures your funds see an inflation adjusted growth while ensuring that it is protected as your goal nears. SSY and PPF are tax-exempt, which gives you the added benefit of saving a significant amount when your need nears.
What Should You Do If You Are Starting Late?
If you’re starting late, investing in high-growth options would be beneficial in accelerating savings. However since the time horizon is shorter, you would be exposing yourself to higher risks. A balanced portfolio, with a mix of equities and safer avenues like a PPF or SSY, would be a less risky yet growth driven option. Regularly review and readjust your strategy based on needs and market conditions.
