How to save for kids' higher education: Check out the best option, here is why
The Systematic Investment Plan (SIP), one of the best tools for this purpose, should start ideally from the time the child is born or at least when she/he is one year old. It is wiser to plan at least 15-20 years ahead, as it could help in compounding of investments and prepare parents to meet the future cost of education in a better way.
Parent’s concern about the future of their children often fails to translate into concrete action and most people fail to plan well in advance. The Systematic Investment Plan (SIP), one of the best tools for this purpose, should start ideally from the time the child is born or at least when she/he is one year old. It is wiser to plan at least 15-20 years ahead, as it could help in compounding of investments and prepare parents to meet the future cost of education in a better way.
There are a few things we should take into account once we decide to invest for the higher education.
Inflation in education
First of all, we make a common mistake about reading the inflation rate while deciding the SIP amount. We are led by the inflation in the economy and accordingly set a target to reach in 20 years. Inflation of the economy can be different from that in the education sector and the pace of growth also can be different.
According to market analysis, the cost for an IIT course now is estimated at Rs 9.20 lakh and it will go to Rs 18.10 lakh in the next 10 years, assuming that the inflation is at 7%. Similarly, the cost of a course at NIT will rise from the current level of Rs 7.48 lakh to Rs 14.71 lakh during the same period. Fees in other leading institutions are also likely to increase from Rs 15.60 lakh to Rs 30.69 lakh.
The case is similar in the case of medical courses too. Now the average cost of MBBS in government medical colleges is around Rs 1.75 lakh and is likely to become Rs 3.44 lakh in a decade. The fee in private medical colleges will increase from Rs 25 lakh to a whopping 49.18 lakh. It also means a big difference in the Equated Monthly Installment (EMI)amount if one is taking a loan for education. So, it is important to assume a relevant and reasonable inflation rate in the education sector over the next 10 or 20 years and then decide on the SIP amount.
Stick with your SIP
Secondly, once we decide to invest and set a long term goal of 20 years, it is important to stay put despite the market fluctuations. People tend abandon the SIPs half way through, because of volatile market conditions. History shows that staying invested for 20 years in SIP has given high returns, despite multiple marekt corrections during the period.
Industry data shows that all top mutual funds recorded a CAGR between 10 and 20 % in the last 20 years. Franklin India Prima Fund grew at 23.74 %, followed by HDFC Equity Fund (21.77%), Aditya Birla Sun Life (20.09%), Reliance Vision Fund (20.04%), DSP BlackRock Equity Fund (19.87%), Franklin India Bluechip Fund (19.13%), SBI Large & Midcap Fund (Erstwhile SBI Magnum Multiplier Fund) (18.87%), Tata Large Cap Fund - Regular Plan (18.70 %), to name a few among the top players.
A quick calculation shows that one should be investing around Rs 9,984 for the next 10 years, assuming that the SIP will grow at a conservative 8%, to be able to pay for a course in an IIT. If SIP grows at 12%, the investment should ideally be around Rs 8,079 per month.
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It is also crucial to monitor the annual inflation growth and make adjustments accordingly to the investment plans. For example, after two years if we find that our target of Rs 40 lakh may fall short, due to the probable rise in cost of education, we may need to revise the SIP investment plan and step up the investment. Start investing and stay invested to secure the future of your children.
By Renjith R G
(The writer is associate director, at Geojit Financial Services)
Source: DNA Money