A step-by-step guide to building your child’s higher education fund

Representative image

Building a higher education corpus for your child is a long-term financial goal that requires careful planning and discipline. Here’s a step-by-step guide to help you effectively accumulate the required funds:

Step 1: Define your goals

Estimate future education costs: Research the current cost of higher education (both in India and abroad if you’re considering international education) and account for inflation, typically around 6-10% annually for education costs.

Determine the time horizon: Calculate how many years you have until your child reaches college age, typically 18 years, to determine how much you need to save each year or month.

Step 2: Calculate the target corpus

Use future value calculation: Based on the estimated costs and time frame, use a future value formula or a financial calculator to estimate the amount you’ll need by the time your child reaches college age.

Account for inflation: Multiply the current cost by an inflation factor to get an accurate target corpus. For example, if the current cost is ₹10 lakhs, with an 8% inflation rate over 15 years, the future cost might be around ₹31.7 lakhs.

Step 3: Assess your current financial situation

Review existing investments: Check if you have any investments earmarked for your child’s education.

Determine the shortfall: Compare your current savings to the estimated target corpus to find out how much more you need to save.

Step 4: Choose suitable investment options

Equity Mutual Funds: For a time horizon of 10+ years, equity mutual funds are ideal due to their high potential returns (around 10-12% annually over the long term).

Systematic Investment Plan (SIP): Start a SIP in equity mutual funds for disciplined, long-term investment.

PPF (Public Provident Fund): A safe investment option with a 15-year lock-in, suitable for conservative investors. PPF has a tax-free return and a current interest rate of around 7-8%.

Sukanya Samriddhi Yojana (for daughters): This government scheme offers a high-interest rate with tax benefits and is designed specifically for girls’ education and marriage.

Debt Mutual Funds or Fixed Deposits: Use these for shorter investment durations or if you want lower risk. Debt funds typically yield around 6-8%.

Child-specific ULIPs: Some Unit Linked Insurance Plans (ULIPs) offer a combination of investment and insurance for children’s future needs, but consider fees and returns carefully before committing.

Step 5: Create an investment strategy based on your risk tolerance

Risk tolerance: Younger parents can consider more equity exposure for higher returns, while those closer to the goal might balance with safer debt investments.

Diversify: A combination of equity, debt, and government-backed schemes can provide a balanced portfolio that reduces risk while maximizing returns.

Step 6: Automate savings and review annually

Automate investments: Set up automatic SIPs or recurring deposits to ensure disciplined savings without manual intervention.

Review portfolio annually: Adjust your investments based on market conditions and your child’s changing needs. As you approach the goal, consider shifting from equity to safer debt options to preserve the corpus.

Step 7: Consider insurance for protection

Get adequate life insurance: Ensure you have a life insurance plan to cover your child’s education costs in case of unforeseen circumstances.

Education insurance plans: Consider child education insurance plans that provide a lump sum in case of the parent’s untimely death, ensuring that education savings continue.

Step 8: Re-evaluate and adjust as necessary

Monitor costs and inflation: Higher education costs can fluctuate, so regularly update your target corpus as needed.

Adjust investments: Based on the market or changes in your financial situation, adjust your investment plan to stay on track.

Step 9: Plan withdrawals strategically

Start withdrawing gradually: As you approach the goal, gradually shift to safer investment options to protect the corpus from market volatility.

Consider tax implications: Be mindful of tax-efficient withdrawals to maximize the funds available for your child’s education.

By following these steps, you can build a well-rounded education corpus that will help ensure that your child has the financial resources they need for their higher education goals.