Education expenses occupy the lion’s share of the average Indian household’s income. According to estimates, the cost of education in India has been growing at a staggering rate of 10-12 percent annually – many notches higher than the current inflation rate in the country. Even if moderate estimates are to be believed, the 6 percent education inflation theory could mean the expenses of an engineering course (that currently costs around Rs. 5-7 lakhs) could be anywhere in the Rs. 15-18 lakhs range within the next decade and a half.
Getting an MBA degree from the top IIMs in the country is likely to cost over Rs. 44 lakhs, 10 years down the line – almost the time the next generation will be ready to enter their high school/ university phase. In fact, experts have predicted an assured entry of global brands in the future, potentially making education an even costlier affair than what it already is. Therefore, it would only make sense if you start planning for it, beginning right now.
1. The Early Bird Seldom Misses Out
One of the obvious solutions is to start investing and saving early. While a sum of Rs. 50 lakhs can seem daunting, investing Rs. 12,000 per month, for 15 years (considering annualized returns of 15 percent) can take you to the desired corpus. Since education inflation in India is high, you must invest regularly and aim to benefit from compounding. This way, not only will you be able to start with less, but also be able to amass more.
A delayed start can derail your financial goals, ultimately forcing you to save more, take more risks, or even dip into your retirement corpus. These are all undesirable.
2. Invest in the Right Instrument
Remember that a staggered start is just the beginning. How the road will pan out for you will depend on the instruments you choose. With a long-term objective of funding your child’s higher education, you can invest in equity mutual funds (considering you have the stomach for risks). They have the potential to generate long term returns that beat inflation, thereby helping you build wealth in a more assured and sustained manner.
Though investing in equities directly can offer better returns over a long-term, not many can boast of that risk-taking appetite, in keeping with the Indian investor’s reputation of seeking cover from market volatilities. However, with a longer gestation period (ranging between 15-18 years), equity investments can average such extremes.
A higher equity allocation of about 70-75 percent is a pre-requisite to beating India’s walking inflationary tendencies. The balance can be invested in other safer alternatives such as PPF and tax-free bonds. Since bank deposits are taxable beyond the Rs. 10,000 interest income limit, it is advisable to go for debt-oriented mutual funds that minimize risk while helping you with a steady source of income.
3. Play Safe in the Short-Term
If the gestation period is less than six years, consider fixed-income securities, which in spite of offering comparatively lower returns, guarantee capital safety and less risk compared with equity oriented funds. With a gestation period of 5-6 years, you can move ahead with a mix of debt mutual funds, debt-oriented hybrid funds and recurring deposits; with each one of these bearing a potential to generate steady returns while checking risks.
4. Regularly Revisit the Portfolio
Having built yourself the portfolio, do not forget to review it annually. The two crucial aspects to higher education include the standard of living and tuition fees – with either or both the components being subject to unanticipated hikes. Find out if the forecasted inflation percentage has actually panned out. A regular review of your portfolio might throw up a pressing need to step up the SIPs.
If a fund is not performing along the expected lines, don’t rush to sell it. Learn the reason for its under-performance. Compare it to the benchmark. Moreover, as the gestation period changes, be flexible to the idea of portfolio rebalancing. As the goal nears, you can gradually move your investments from equity mutual funds to debt funds through a Systematic Transfer Plan (STP). This will help you cut down on the risks.
IDFC Mutual Funds offer a gamut of investment opportunities in the form of equity, debt, and balanced funds. Invest as per your risk appetite and investment horizon. Visit www.idfcmf.com to know more.
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