Building a corpus for your child’s higher education? Take these points into consideration

Sep 29, 2018 | 3 months ago | Read Time: 3 minutes | By iKnowledge Team

How does one save up enough to ensure your child plans come to fruition despite the ravages of inflation?Build A Corpus For Your Child’s Higher Education - Aegon Life

The cost of education has been spiking to new heights constantly for the past decade. With more education institutions popping up, the competition to get into the best one along with the cost of sustaining the education program is heating up. The batch of 2018 for the Indian Institute of Management-Ahmedabad is going to end up paying Rs. 19.5 lakhs for the two-year course. No less than 400% times what the premier B-school charged in 2007. If the rates continue to rise at 20% every year, it will cost roughly Rs. 95 lakhs in 2025.

That’s why, if you want to plan for your child’s future, we help you with the most appropriate investment options and appropriate strategy for three broad age groups:

Stage 1: Early Years

Parents interested in enrolling their kids for higher education must begin as early as they can, almost as soon as their child is born, if not before. A good strategy would be to invest in SIPs and start small at Rs. 5,000 across 3 mid-cap equity funds. If you continue with that amount and say your funds earn 12% a year, you would end up with a neat Rs 20 lakhs by the time your 4-year-old is ready for college. From here on, keep increasing your investments as best as you can, say Rs. 10,000 as your income grows. In the event of SIPs getting a hike of 20% every year, your egg will have cooked as much as Rs 1 crore in 13 years.

The benefits of an early start cannot be stressed enough. Should you delay your investing strategy at this stage by say six years, you will have invested Rs 9,195 a month to reach a target of 25 lakh. Wait for three more years and the required amount jumps to Rs 23,875. This will certainly limit your ability to take risks.

Stage 2: Growth Stage

Child plans such as Aegon Life’s iMaximize change as your kid grows older, with barely 5-9 years left to save. Your risk appetite will have to be lowered. Keeping your child plans in focus, a set of balanced funds is a much risk averse option. Instead of equity funds that invest the entire corpus in stocks, go for a 50-50 mix of stocks and bonds instead. iMaximize plan can also cater to your child’s needs in your absence through the Triple* Benefit pay-out option, which provides financial relief in stages. No allocation charges mean you maximise the return from your investment as the full amount gets exposure to the fund of your choice.

If you wish to lower risk even further, monthly income plans (MIPs) are safer with no more than 15-20 percent invested in equities. They are even more risk averse than balanced funds. However, returns from MIPs fall short by almost 5% as compared to equities. Additionally, MIPs are taxed at 20% after indexation benefit while the other two remain tax free.

As for debt, recurring accounts that mature around the time your child is scheduled to apply for college are a good idea. You could also start an SIP in a short-term debt fund since they are more tax efficient if the holding period crosses three years.

Stage 3: Flight Plans

Capital protection must be your top priority in your child plans. With the goal barely 1-4 years away, the equity exposure at this stage should not be more than 10-15% while 75% of your accumulated corpus must go avail safety in a bank deposit.

This shift from growth to capital protection is critical. Market volatility is not friendly to those who wish to save and protect, so equity is out of the question. Switching from equity SIPs to short-term debt funds is a smart move.

Backup

In the instance that you end up falling short of funds and dipping into your retirement funds feels like a go-to option, do stop in your tracks. Your nest egg is worth more than your child’s higher education. Apart from keeping your retirement plan savings intact, it will inculcate a savings discipline in your child after he/she takes up a job.

II/Sep 2018/4428


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