How to Invest in Child Education: A Comprehensive Parental Guide
22 May 2024
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Key Takeaways
- Start planning and investing early to ensure you can comfortably meet the future education costs of your child.
- The education inflation rate is higher than general inflation, so consider this in your savings plan.
- Opt for investment avenues that offer returns higher than the inflation rate to build a sufficient education fund.
- Periodically review and adjust your investment plan to ensure it stays aligned with your financial goals and changing circumstances.
Investing in child education has become one of the most significant financial responsibilities for families today. Quality education requires substantial investment and meticulous planning. Research indicates that investing in education yields higher returns compared to financial investments in stocks and bonds. As a result, it is imperative to have a clear understanding of the potential costs of your child's higher education when they reach the appropriate age.
This guide will walk you through the process of calculating the monthly savings required to fund your child's future education.
Ascertain the Time Frame
The time frame is crucial when designing an investment portfolio for your child's education. To calculate this, determine the difference between your child's current age and the age at which they will pursue higher studies. This period represents how long you have to invest.
For instance, if your child is currently 5 years old and will start their degree course at the age of 18, you have a 13-year window to save. This time span helps in formulating a realistic and achievable investment plan.
Analyse the Cost of the Course
The next step involves researching the current costs of the courses your child is likely to pursue. Costs can vary widely depending on the type of course, the institution, and the location (whether local or abroad). Additionally, consider other expenses such as books, stationery, accommodation, food, transport, and coaching.
By obtaining a thorough estimate of these costs, you can set more accurate saving goals. For example, the current cost of a degree course, including all associated expenses, provides a baseline for your financial planning.
You can create a complete education journey for your child to find out year-by year expenses, educational requirements, and savings options with Invest4Edu.
Account for Education Inflation Rate
Education inflation typically ranges between 10-12%, which is significantly higher than general household inflation. This means education costs are expected to rise faster than other services. Incorporating this inflation rate into your calculations is essential to ensure your savings remain adequate.
For example, if the current total cost of a degree course is ₹15 lakhs, factoring in a 10% annual inflation rate, the cost will escalate to approximately ₹52 lakhs in 13 years.
Choose the Return Rate Wisely
To build the required education corpus, it's prudent to select investment options that offer returns higher than the inflation rate. Investments in mutual funds or equities are likely to yield higher returns compared to traditional bank deposits. Seeking advice from financial experts can also be beneficial.
Opting for high-return investments ensures your savings grow at a rate that can outpace inflation, making it easier to reach your financial goals for child education planning.
Determine Your Monthly Investment Target
With all necessary data at hand, including the estimated future cost and the desired return rate, you can calculate the amount to be set aside as monthly savings. This amount should be invested systematically to achieve your child's higher education goals.
For instance, if your goal is to accumulate ₹52 lakhs in 13 years, you need to start an SIP of roughly ₹13,800 per month with expected rate of return at 12%.
It is far more easier to manage ₹13,800 per month now than to arrange a lumpsum of ₹52 lakhs at the time of need.
Keep Reviewing Your Investments
Even after setting a goal amount for your monthly SIP (Systematic Investment Plan), it's advisable to review your investments periodically. Adjust your SIP amount with any increase in your income or savings to ensure your plan remains on track.
Regular scrutiny and adjustment of your investment strategy will help you stay aligned with your goals and adapt to any changes in financial circumstances.
Following these six steps will enable you to plan effectively and invest for child education in India. By starting early, considering inflation, choosing the right investment avenues, and regularly reviewing your plan, you can ensure that your child's future education is financially secure without imposing a significant burden on your finances.