Having the right amount saved for your child’s education is always a challenge. An even bigger challenge is to make and track the investment.
There are a few common problems which guardians or parents face while investing. First, they plan for and save the amount in an ad-hoc manner. I still find that people don’t take into account inflation and hence forecast a lesser amount for the education goal.
Second, deciding on the instrument to invest is not easy even though the main options available are mutual funds, children’s plans from insurance companies and Sukunya Samraddhi Yojana (SSY) scheme.
The conundrum faced by most investors on the choice of instrument is the risk in the instrument. Child Plans and SSY are low risk but come with their own set of problems.
Child plans have not given returns commensurate to the inflation in education (which is @10-15 percent per annum) and also come with the disadvantage of covering the life of the child (which is really not required).
With SSY, only 50 percent of the accumulated amount can be withdrawn at the age of 18. Hence many parents have started investing in mutual funds through SIPs.
Third, the operational procedure involved in investing can be a bit cumbersome. Either the parents make the investment in their name to be used for the child’s education or contribute funds towards their ward’s account for the investment.
The main issue that arises is that while people start off by allocating certain investments for child's education, somewhere they are not able to adhere to the investments. The other issue is whether investors are able to keep with the rising inflation on education expenses.
Just like NPS (National Penson scheme) for retirement, we need certain instruments demarcated for education expenses i.e. a college savings fund. This could be akin to the 529 Plans in the US.
A 529 plan is an investment account that helps to accumulate savings for education expenses and provides tax-free withdrawals for qualified education expenses in higher education. The expenses allowed are tuition, books, equipment and boarding expenses.
Most funds offer different types of investment plans including age-based portfolios i.e. an auto allocation between equity and debt based on the age of the child.
The advantages of a college savings fund are many. First, it gives parents the convenience of saving for their child’s education in one instrument. Second, investors also do not have to think about how much to allocate to debt or equity as the fund would do it automatically. Third, being an automated investment, it will ensure that the said amount is invested in a disciplined manner. Fourth, the parent has complete control over the account. Fifth, close relatives can also make contributions in form of gifts into the account subject to certain restrictions.
Of course, like NPS, such accounts will be partly inflexible and rightly so. For example, if withdrawals are allowed for non-education purposes or early withdrawals are allowed, it becomes easy for parents to dip into these savings for other purposes just like how PF (provident fund) accumulations are being used to fund home purchases.
In India, the college savings fund can be created on the lines of NPS, which is low cost, has many pension fund managers and offers different investment plans. The government can also consider giving some tax benefits on the withdrawals to promote savings into these plans. Investors need to be cognizant that being market linked, these funds cannot be considered risk free or low risk.
Goal-based investment solutions like the college savings funds can provide ease in decision-making and investing for investors.The author is a financial educator; founder director of Finsafe India and co-founder of Womantra.