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Bankrolling Your Kid's Education


High on investment, low on immediate returns, Arun Rego suggests practical ways for planning your child’s education costs

planning for ones child’s education -
Planning for your child’s higher education has had a voluminous change. Parents’ are now keen on planning ahead of time. The mindset has changed wherein one does not want to scrape ones lifetime savings anymore. In this modern era, there are hundreds of investment tools which match an individual’s need of educational planning.
Here’s a quick look at how one should go about planning for ones child’s education -

Cost Escalation Pattern
A Post - Graduation degree could well cost your over Rs 8 lakh now, as against about Rs 5 lakh about five years ago. This translates to a whooping 10 per cent increase over the years’, starkly above any of your economic indicators. Education cost is infact the fastest growing factor, almost closely in-sync with medical expenses. The quality of higher education is also improving and it has come to a point wherein one has to plan well for the child to realise its dreams. It has boiled down to a simple rule of ‘Best being offered at a higher premium’.
One needs to factor in this cost escalation component while planning for education. On an average one could include an escalation factor between 7.5% - 9%. Given in the table is a n example of how to arrive at the required corpus for a one-year-old child.
Child Plan
Although, there has been a school of thought aversive towards insurance, it is one of the best ways to plan for your child’s education needs. Broadly, one needs to keep the risk appetite - Low to Moderate, given the nature of this need, you cannot indulge in too much equities. Child plans (Traditional / guaranteed) offer exactly that, a flavor of safety and security to this all-important need. Children insurance plans are meant for the benefit of children, to save money for their key financial goals education and marriage.

The benefits under these children policies are designed to coincide with the requirements of children at different stages of life, that is, at the time of higher education, settlement in profession or marriage, among others. These are money-back type of policy (periodic payouts), the other type being endowment (payout one time at end of term). There are options under children insurance plans to insure the life of the parent or the child. It is advisable to opt for a plan where the life of the parent is insured, as it can make the child the beneficiary and hence, provide protection during the child’s growing years.

A good child plan can ensure a smooth, guaranteed and risk-free financial future for your child. Whenever you buy any insurance plan, understanding the key features and payout is vital, normally traditional plans are not transparent on charges. A t5raditional child plan would work best for younger children; hence if you are planning during the early years of the child, then traditional child plan is a must in your portfolio.

Traditional Child Plans can be either Bonus Linked or Guaranteed, as the name indicates one would offer surprises to you and your child based on company’s performance, the other would not! It is a personal choice as to which one you may want to opt for, however, the lower the surprises for Children needs, the better.

Some of the child plans also provide the Waiver of Premium (WoP) rider benefit wherein, on the eventuality of the proposer the future premiums are waived off and the policy will continue to offer payouts as pre-determined.

Child Benefit Mutual Funds
It is best not to solely plan this need by means of insurance, mutual funds give better liquidity and hence, one can consider adding mutual funds exclusively designed for children education / marriage. Child Benefit Mutual Funds are exclusively designed to payout out sizable chunks of amount which can be used for Children Education / Marriage.

Given the conservative need for which the fund is used, the calls taken are pre-dominantly defensive; the funds objective explicitly states that it seeks to generate capital appreciation with the aim of giving lumpsum capital growth to the beneficiary (child) at the end of the chosen period. Most such funds have brief lock-ins, hence, enabling the fund manager to take long term calls.

This is a key differential point from a diversified Equity Fund where the fund managers are faced with daily redemption pressures. Most children’s benefit mutual funds are balanced plans providing you with a higher and lower risk level which coincides with the equity exposure of the fund.  However, one can choose to have a part of their funds into Diversified Equity Funds or Balanced Funds which can cater to Higher Education of Child, given the term period under consideration.

Unit Linked Insurance Plans (ULIPs)
When there are fewer years’ to meet the corpus requirement, a ULIP is suggested, within the ULIP one may either choose a Balanced Fund or spread across Debt and equity to strike a right balance.

They also offer the flexibility of withdrawal as per requirement; this is an important feature, since children needs arise in phases. You can also look at a combination of Traditional Child Plan alongside ULIP. Some ULIPs also offer the WoP rider, this is an important and interesting feature that one can consider whilst planning for your Child.

Diversified Equity Mutual Funds and Liquid Funds
A part of your corpus for child’s education can be brought in from avenues with ample liquidity, the corpus you have ascertained is only tentative, incase you end up needing a higher amount, then one can always bring that in from diversified equity / liquid funds. About 10% buffer over the corpus requirement can be planned out of highly liquid instruments; this is more from a perspective to be prepared for any contingent / ancillary expenditure that may arise at the nick of the moment whilst planning for the need.

Apart from these avenues, the traditional avenues like bank fixed deposits, Government Bonds, Post Office Savings are avenues that can be used for planning your child’s education needs.  Keep in mind that many of these avenues are taxable and this could eat into your returns substantially.

Go ahead and plan for your child’s education today.

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