Child Education Planning: Funding Education Is No Child’s Play

Mark Zuckerberg and Bill Gates may have minted their billions without a college degree adorning their walls; but it’s a well-known fact that for most people, the quality of their education will go on to materially affect their lifetime earning capacity, as well as the speed of their ascent up the corporate ladder. In fact, a recent US-based study by Wai & Rindermann of Duke University all but tore down the long-romanticised myth of the “mega-successful college dropout”, showing that a whopping 94 per cent of top US leaders (including Fortune 500 honchos, senators and federal judges) finished college – and a statistically significant 50 per cent attended an elite school.

If you, like all other Indian parents, dream of being able to afford a world-class college degree for your child, here are three mistakes you should be avoiding at all costs.

Piling on those Traditional ‘Child Plans’
For most people, child education planning equals purchasing a traditional child plan from an insurance company. Typically, these plans call for a fixed premium paying term, followed by a series of guaranteed periodic cash pay-outs, purportedly aimed at delivering liquidity for your child’s tuition fees at pivotal points of time. A sliver of  life coverage is attached to these plans too.

However, these plans fail to solve real problem, since they usually grow your money at just 5-6 per cent per annum and provide what is at best, an inconsequential death benefit amount. The manner in which the so-called benefits of most child plans are represented end up blindsiding us from their actual efficacy.

The SIP route
Mutual fund SIPs (systematic investment plans) have gained tremendously in popularity over the past two years, and for good reason – they provide the average retail investor who has little or no understanding of the way equity markets function, with a convenient means to make bite-sized investments into equities – a time-tested avenue for long-term wealth creation.

Here’s the catch. If you have time on your side, go for SIPs in aggressive small and mid-cap oriented funds, regardless of your risk tolerance. Don’t let risk aversion come in the way of your benefiting from the long-term compounding that could accrue from more aggressive funds. Over longer time-frames, even seemingly small return differentials could end up materially affecting the size of the fund that you accumulate. Consider this – over a 15-year time-frame, the difference between an annualised return of 12 per cent and 15 per cent on a monthly SIP of Rs 10,000 would translate into Rs 16 lakh!

Protecting the Goal
Goal  protection is a vital component of financial planning. It is an irony that though we’re a nation of prolific Life Insurance buyers, most of us leave the gates wide open when it comes to ensuring that a calamitous event doesn’t affect our children’s college education. This results from a poor understanding of Life Insurance as a risk-transfer tool.  

Protecting your child’s education planning goal simply involves upping your term life coverage by an amount that is equal to the present value of your target amount, discounted by a reasonable rate of return – say, 10 per cent. A Financial Planner can help you arrive at this number.

For the term plan that you are earmarking for this purpose, appoint a trusted person as an appointee, who will receive, invest and deploy the sum assured in case of your unfortunate death. Also, make sure you close loop your goal protection strategy by drafting a will, clearly mentioning the sole purpose that the policy proceeds must be used for.

Do note that the aforementioned strategy is effective only when combined with an aggressive savings plan; for instance, through mutual fund SIPs. The assumption here is that at any given point in time, the moneys accumulated through your savings, coupled with the policy proceeds, can be invested into a moderate risk portfolio for the time remaining to your goal to achieve your planned target amount - even in your absence.