How to fund your child’s higher education

Coaching classes for competitive exams for medical school can be expensive. Akruti and Ayan should save to be able to afford such coaching.

Studying in a private medical college in India or studying medicine abroad is even more expensive. They may want to make extra provisions for that, if that’s a viable option.

Also read: All about preparing for the great Indian foreign education dream

Goal-based investing

Goal-based investing refers to tailoring and tracking a portfolio to achieve a specific goal, rather than simply tracking returns above a benchmark. The investment decision depends on the requirement vis-à-vis the goal.

Akruti and Ayan’s son is now eight years old. This makes it the right time to invest for their son’s higher education. Given that he will be starting his MBBS preparations when he is 16, his parents have about 8-10 years to save and invest. Therefore, the earlier they start investing, the better.

The goal-based approach can be to save Rs 80-85 lakh in about 8-10 years. Their portfolio allocation can be weighted towards equity, given that they have some time. The growth expectation from equity is between 11-12 percent over the long term. Equity also serves as a shield against soaring inflation.

The child’s age has a direct bearing on the asset class the parents must choose. For example, if their son was 15 instead of 8 years old, they would have fewer years to achieve the goal. As a result, their investment approach cannot be as aggressive as in the earlier scenario. The time to maturity and risk tolerance play a vital role.

Also read: Studying abroad? Be aware of these 5 additional costs linked to your education

Consider education inflation

While planning for such goals, parents must consider education inflation along with the broader inflation.

If, say, MBBS in a private college costs Rs 30 lakh currently, given 10 percent education inflation, it would be close to Rs 80 lakh after ten years. So parents need to plan their investments accordingly.

Considering that Akruti and Ayan need Rs 80 lakh after 10 years, with about 12 percent returns annually, they need to save approximately:

- Rs 4,55,873 annually, or,

- Rs 37,879 monthly

If Akruti and Ayan mistakenly account only for CPI at 6 percent, the corpus they would end up planning for would be around Rs 54 lakh only. This shows that at the crucial time of their son’s admission, the parents would fall short by Rs 26 lakh.

To avoid such a situation, parents must take into consideration education inflation rather than headline inflation.

Also read: How to save and invest for your child’s foreign education goal

Separate investment portfolios for different goals

Akruti and Ayan together aim to save Rs 1.50 crore for their retirement. This is in addition to saving for their son's future. Both are in their 40s and wish to retire at 60. Unlike the retirement goal, their son’s education fund will be needed in just eight years.

Thus, the couple should have different investment portfolios for different goals.

For retirement, they can park money:

- In equity through stocks, ETFs, mutual funds (monthly SIPs or lump sum).

- In fixed income instruments such as NPS, PPF, PF.

- In alternative asset classes such as sovereign gold bonds, gold ETFs, international mutual funds.

In the same way, Akruti and Ayan can also build a portfolio for their parents. Since their parents would be close to retiring or already retired, liquid instruments would be preferred options (i.e., interest income from fixed deposits). It can provide their parents with a stable and regular income.

Separate investment portfolios will ensure that the couple has a clear plan for their targets. Diversifying risk across asset classes will also help them mitigate risk.

Insure yourself to protect your family

Life is uncertain, so the couple needs to opt for a term policy. In case of an unfortunate event, that will work as a financial cushion for their spouse, parents, and son.

The ideal term plan should cover at least 7X 10X the annual income. This would take care of any existing debts like home loans, and help secure the child’s future in the absence of one parent.

In addition to a term plan, Akruti and Ayan should have adequate health insurance for the family - one policy (family floater) for themselves and their son, and the other for their parents.

Thus, the couple can avoid any large and uncertain medical and hospitalisation expenses that can potentially disrupt their budget and financial planning.

Planning ahead holds the key

Parents like Akruti and Ayan have to plan for their child’s future years in advance. They should set clear financial goals, be consistent, and, if needed, seek the help of an expert.