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Save today for your child's education, tomorrow!

PLANNING for the child's future is something close to the heart of most parents. So it was for Neha!

Neha started worrying about her four-year old son Roshan and her 6-month old, Puja. She was fretting about the enormous sums being demanded as 'donation' for admitting kids into school. They had paid Rs 75,000 for Roshan’s admission, and the fee works out to Rs 2,500 per month. This does not even include book, uniform, picnics etc. And there were the other expenses for activities like skating, swimming, karate etc. No wonder, she was worried. In three years, Puja will also join the school. The expenses will then be quite a packet.

Avinash, her husband, was earning decently. At 32, he still has a long working life and a promising career ahead of him. His take home at Rs 45,000 per month is decent. But Neha was worried as there are all those EMIs and expenses, which puts a strain on the purse. Many times, they stare at an empty void in their moneybox, at the end of the month.

What scares the daylights out of Neha is the children’s education expenses. Also, the college fees these days get revised year- on-year, in quantum jumps. Add to that the fact that the child may pursue arts/commerce/engineering/medicine, which is not clear right now. So, what amount to provide for, for education needs of the child becomes tricky.

As financial planners, this is a familiar territory. Let us help Neha in planning for her child’s education needs.
1. Many gravitate towards child policies. Child policies are nothing but money back policies, where the return on investments tends to be low. In case if the same policy is unit-linked, it looks broadly similar to a mutual fund scheme. Some child policies have unique features like income benefit, which is typically a rider. If the parent were to pass away, the family will start receiving a portion of the sum assured back (say 10 per cent per annum) till the end of term. This could be useful to enable the child to complete the education. But one could also take a term plan. On demise, it could give a sufficient corpus to enable the child to complete education.

So, child policies can be one part of the planning. Term plans also can be considered to hedge the life risk of parent.

2. Another strategy is to invest in child plans from mutual funds. Most of them are balanced funds. There are those which allocate more towards debt and others that allocate the bulk towards equity. These are available across mutual fund houses and can be chosen in line with the overall strategy.

3. If you want to accumulate the education kitty in safe investment options, you have PPF, recurring deposits, bank deposits, KVPs etc. Though safe, the growth of the corpus is also rather modest. However, this cannot be the only way to build the child's education corpus.

4. Mutual funds can give excellent returns, over a long time frame. A lot of people get unnerved by the short-term fluctuations that are endemic to the stock market. But the risk of losing money comes down when held on for a longtime. In fact, mutual funds have the potential to deliver a 12 to 15 per cent per annum returns, in the long-term (about 10 years). You can also invest in equity. The risk profile, here, is higher and is recommended only if you can stomach the risk.

Projecting the cost of your child's education
It is easy to project what will be the future cost at an assumed inflation factor (say 8 per cent) for education – Rs 6 lakh needed today would be Rs 25.9 lakh.

Projecting for such long-terms, is fraught with danger – the child might end up doing a course requiring lesser or more money by way of education expenses, inflation rate could be off the mark, investment returns could be different from the one assumed or it might become difficult for the parent to consistently put aside the required investment every year. So, when a plan is created, it is a good idea to revisit the plan every year so that you can make changes in line with your goals.

The key is to start planning early, because the earlier you plan, the lower the amount to be put aside. For instance, if the target amount after 19 years is Rs 25 lakh, Neha needs to put aside only Rs 4,696 per month (assuming 8 per cent returns). The amount goes up to Rs 13,665 per month, if the savings tenure is 10 years – about 3 times more.

Let us now look at what might be helpful for Neha.
A 50 to 60 per cent allocation is recommended towards equity MFs. Equity diversified funds (with large to midcap orientation), Index funds, balanced funds and a small exposure to Gold ETFs (5 to 10 per cent of the MF allocation) could make up this portion. A 30 to 40 per cent allocation can be made to the debt investment options like PPF, bank deposits, recurring deposits etc. A 10 to 20 per cent allocation can go to insurance plans depending on what kind of plan is being contemplated – term or a child plan.

Make your child's dream, a reality

LOOKING out of the balcony on a Sunday morning was Dr. Shastri sharing his feelings with his wife over a hot cup of tea. The morning was indeed pleasant but not his concerns. Dr. Shastri had a glitter in his eyes when he expressed, "I wish to see him as the best cardiac surgeon one could think of! If he actually lands up being another doctor round the corner, he will never be able to make a mark in life. I do see a lot of potential in him even now at his age of 12."

Mrs Shastri too nodded in agreement. This conversation was followed by a long silence as each one contemplated how to meet their son Rahul’s medical education needs.

The Shastris were a happy and content family enjoying a fair level of luxuries and amenities. All the current needs and desires were being met without any problems whatsoever. A third person would never have been able to see what Dr. Shastri was apprehending.

He had already approximated the rising costs of education as:

· Rs. 40,000 a year, upto Rahul’s second year of junior college (standard 12th).
· Rs. 1,50,000 a year, for the 5 ½ years of his MBBS degree, including internship
· Rs. 12,00,000 in total over the 6 years of Rahul’s post-graduation and specialisation as a cardiac surgeon.

Withstanding an annual increase of 5% in all fees due to inflation, Dr. Shastri would altogether require an unimaginable corpus of Rs. 53.52 lacs. This would effectively mean an investment of Rs.14.63 lacs today to build this huge education corpus.

Dr Shastri too, like other educated and concerned parents had made certain arrangements towards his son’s education needs:

· A Komal Jeevan policy from LIC
· A Smart Kid policy from ICICI Prudential Life Insurance
· An investment of Rs. 2 lacs in HDFC Mutual Funds Children’s Gift Fund 2 years ago

Though at the outset the invested figures seemed sufficient, the calculations gave a totally different picture. The valuation of the above investments in Insurance policies and mutual fund stood at Rs. 6.91 lacs in present value terms, whereas the actual amount needed was more than double i.e. Rs. 14.63 lacs as of today to manage their son's career funding.

Dr Shastri was left flummoxed the first time this reality dawned upon him.

As a matter of fact, Dr Shastri is not alone. There are many of us in similar situations with similar dreams for our children. Giving our child the best possible education is always our first priority. Why not? However, clarity of goal does not ensure its completion.

The fundamental question is whether we are aware of what it will really cost to realise this goal, and whether we have a structured plan to manage all the cash flow demands as and when they are likely to accrue.

These and other such fundamental issues arise because we tend to manage education funding as and when it accrues. We don't plan for it in advance. We tend to think that we will manage it when the requirement calls for providing education funds. While most of us tend to buy insurance policies or invest in bonds or some mutual fund schemes to fund child’s education requirements, it is often inadequate.

We don't realise because most of us never really get into the mathematics. Our parents did not need to plan as education was generally inexpensive to be given such high importance but the times are very different today.

When the demand for money actually accrues, many of us may get confused or stressed on how to raise resources, and so, we tend to break fixed deposits or withdraw from PPF accounts or take loans on against PF accounts or sell other good investments. Such actions may take care of education needs in the short term but in the long term we have generally speaking eroded other assets. The impact of which will be seen only a few years later.

Education funding demands may also entail making compromises on our other goals, be it purchase of a house, retirement funding or holidays. We generally tend to delay other requirements and let education needs take precedence over all other planning needs. It can put our entire financial resources out of gear as education costs have a much higher rate of inflation.

Such erratic decisions not only eat into all our savings and investments but may also compel us to take loans and thus jeopardize our future cashflows. The worst is the fact that we are totally unprepared and thoroughly confused as to how to fund such needs.

Today, unfortunately, we do not have any mechanism, service or product that can TOTALLY manage all the fund flows during the entire time span of the child’s education. Hence another lesson to be learnt is that no insurance policy, child plans, mutual fund schemes alone can fulfil all the requirements for creating an effective education funding plan.

A thorough and well crafted Education Funding Plan is the most rational thing to do. If not, either the child may need to sacrifice his/her education & career aspirations or we may have to compromise on many of our other goals.

In conclusion…
Education funding for your child is going to be probably the most expensive and the most indispensable investment of your life. But if it is planned for well in advance, it would not merely remain a dream and be a huge drain on financial resources.

Getting your act together… here is a simple exercise. This will give a good approximation for you to understand where you stand.

1. Put down on paper estimated expenses (be as realistic as possible) for each year from now until the end of your child’s education. Call this value “A”.
2. Total up all the funds you will get in future given the provisions you have made today for your child’s education. Call this value “B”.
3. If the child is less than 12 years of age, multiply value A by 2 and divide value B by 2. If the child is more than 12 years of age, multiply value A by 1.5 and divide value B by 1.5.
4. Now consider C = B-A (i.e. subtract A from B), if the difference is negative you have serious reasons to worry.

Should I buy Child ULIP to secure my child's future?

AS education gets expensive by the year, worry mounts for parents’. Higher education cost is growing at a cost grossly higher than the average inflation rate applicable to a developing economy. With myriad options to specialise in, opting for the preferred vocation will be less of a headache, but funding the same could be more challenging.

For those who have started early, you have gamut of ‘low-risk’ options. However, for those would have missed the bus, we look at various options available for planning children’s education.

Factor-in the cost escalation
Stay realistic about your numbers! To arrive at the cost requirement, you need to look at the future rate of growth and arrive at a corpus. This corpus, however, depends on the current age of your child.

Here’s an example of how to arrive at the required corpus for a child:

Options to meet the cost!
If you have a high risk taking appetite, Unit Linked Insurance Plans (ULIPs) is the popular choice. Since this is a long-term need, the equity risk may get averaged out. So, we suggest you go for Child Plan ULIPs that have the parent as the life assured. When this is the case, the Child Plan ULIPs provide life risk protection which is one of the most conservative of needs for most parents.

In case of the demise of the parent who is the life assured, the nominee is immediately paid out the sum assured. In addition, the maturity value is paid out as planned by the parent. This makes child plans unique.

Key features of Child ULIP Plan
- It offers ample flexibility of withdrawal as per requirement, and you can also stop premium payments after the minimum period
- You can use a mix of debt–equity within the same plan to build the corpus
- You can take advantage of the market returns. However, keep in mind that they carry risk as well. As one approaches the need, one can switch into debt funds so as to avoid market risk
- You can choose both premium and sum assured as required. Unlike, traditional plan where you are required to pay a certain premium on the sum assured chosen by you. Depending on the sum assured you choose, the mortality charge will become applicable

Note
- This plan is best suited for children in the age group below 5 to 15 years.
- Look at this option only when the term under consideration is greater than 7 years. This is because of the higher upfront costs charged by ULIPs, which make it unviable in the short-term.

Kids future: Should I buy child benefit mutual funds?

WE will look at two alternatives to children's ULIPs – traditional child plan and child benefit mutual funds. Arm yourself with information on both these products, before you decide a suitable investment for you.

Traditional child plan
Traditional child plans are important for those looking at a more conservative approach. Keeping this in mind, you could, at least, partially invest in a traditional child plan from insurance company.

What you should know!
- The cover should be on the parent. Avoid policies that offer life cover on your children
- Check whether plan has WoP (Waiver of Premium) benefit. WoP means: In case of death of the proposer, the future premiums will be waived off and the policy will continue to offer payouts as pre-determined.
- It is best suited for children between 0 and 5 years. Post this period, the number of years available to build the corpus becomes less. So, traditional insurance may become ineffective. Traditional plans may not provide flexibility. So, it may not be appropriate if you have started late.
- You should look at this option only when the term under consideration is below 12 years, else you will get very little returns from this plan.
- Your risk appetite is ‘low’

Child benefit mutual funds
Considering the skyrocketing costs of education, it maybe a good idea to plan some part of the investments into avenues that allow:
- Flexibility in withdrawals, and
- Benefit of participating in market returns

Child benefit mutual funds can be one-time investments. They can be made to supplement the other avenues used in planning for your child's education needs.

Key features of child benefit mutual funds
- They are, essentially, hybrid funds having a combination of debt and equity
- Some funds have a lock-in period
- No life cover offered
- You can use this avenue for investing ad hoc cash flows, which you initially intended for you child’s need

Note
- This should be one of the avenues to fund your child's education, however, it shouldn't be the only avenue
- You can alternatively use equity/debt mutual funds as well to bridge the gap. The problem could be that it could get mixed up with other investments and may get utilised for some other need unintentionally.
- An ideal time-frame to include mutual funds within your portfolio to build corpus is 3 to 5 years, which is essentially short–medium term
- The risk profile is adjudged as ‘moderate-high’

Conclusion
Plan your child’s education in advance keeping in mind the inflation rates. There are a host of options to plan for your child’s education, however, an ideal approach is to have a mix of these avenues. Furthermore, all insurance premiums paid towards child plans – traditional and ULIPs -- will qualify for tax benefit under Section 80C, which has an overall limit of Rs 1 lakh along with other investments.

For someone who did not plan this expense, well, there is always the education loan which you can avail for the child. You would require to pay the EMI post the course completion and placement or after a certain period of the course completion. The interest repaid will qualify under Section 80E.

So, plan well and provide your child's dreams, the wings to fly!