Fund allocation for Child best education

One out of three parents consider providing for their child’s education as the biggest expense of their life time. Forget the cost of courses in specialised subjects, or coaching classes or tertiary education.

Even funding a graduation course could set a parent back by several lakhs in today’s money.

As the cost of education has increased in the range of 10-30 % across the board, parents feel the need to start investing with the child’s first baby steps.

We have identified two such parents and got two financial advisors to review their investment portfolios and give their valuable recommendations.

Vinay Singh is a Mumbai-based Bollywood graphic artist. He has two daughters aged eight and five respectively . “Being the sole bread winner of the family, I have to have a sound financial plan to support my daughters’ education,” Mr Singh says.

Although they have a long way to go for their higher education, Mr Singh has been investing Rs 15,000 every month in systematic investment plans (SIP) of large cap mutual funds since 2003.

Apart from mutual funds, he has invested in a couple of child plans with Tata AIG and ICICI Prudential Life. The annual premium outgo aggregates to Rs 88,000.

He has invested some mutual funds in the name of his daughters, but he has ensured that the insurance plans are on his name so that his family could get their benefit in case of unforeseen circumstances. He has closed his housing loan as well as car loan. He has Rs 25,000 to invest every month now.

Graduation is assumed to cost about Rs 8 lakh in today’s terms. Assuming an education inflation of 8% in this period, the cost in those years will work out to Rs 16 lakh and Rs 20.15 lakh respectively.

Now, overseas education will cost a lot more. Since, there is a lot of time, it seems like a good bet to commit most of the funds to equity MFs/balanced and index funds.

Hence, the remaining Rs 25,000 per month can be invested 80% in equity-oriented funds and 20% can be invested in long-term debt-oriented funds or other debt products. Term insurance can be increased by another Rs 50 lakh, at least.

Ulips need to be scrutinised. Health insurance policy should provide a cover of Rs 5 lakh for the couple and Rs 3 lakh for the daughters.

Rajeev Arora has two sons aged seven and three respectively. His main goal is to provide good education in India or overseas depending upon their choice. He runs a tour management company and his wife is a central government employee.

“Even if I am not able to fund the entire amount for overseas education, I at least want to partly fund it through a systematic investment plan,” Mr Arora says.

He has started a SIP worth Rs 5,000 for a time period of 10-15 years. He has invested in some Ulips and the annual premium works to Rs 30,000. He has a term insurance and a health insurance family floater worth Rs 3 lakh.

Apart from SIP, Mr Arora saves Rs 1,000 per month in PPF on his son’s name. He plans to scale up his investments by 10-15 % every year.

An MBA from a reputed institute costs approximately Rs 12,00,000 in present value terms. For his son aged seven, Mr Arora would require a corpus of approximately Rs 30,50,000 when he is 22 in the year 2024, assuming a rate of inflation of 6%.

Similarly, for his son aged three, the amount would be Rs 38,50,000 in the year 2029. For elder son’s education, Mr Arora should do a SIP of Rs 4,200 and increase it by 10% each year up to Rs 16,000 in the year 2024. The IRR of the overall portfolio will be 11.21%.

For younger son’s education, he should start SIP of Rs 2,900 and increase it by 10% each year up to Rs 14,500 in the year 2027. The IRR of the overall portfolio will be 11.50%. Mr Arora should construct an aggressive asset allocation (equity 80% and debt 20%) at an initial level and should progressively shift towards debt (5:95) as we approach the goal.

Investments in PPF should be directed towards building a corpus for your retirement. Also, review the term insurance requirement over a period.
Source - Economic Times

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