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The Cost of Education is Rising Faster Than Inflation. How Can You Be Prepared?
October 30, 2017

With secondary schooling taking up to half of your household budgets, and the cost of higher education rising much faster than inflation, how can you, as parents, prepare to fulfill your children's dreams? We explore various mutual fund investment options with different investment horizons in mind - it's never too late to start planning!

Author : iFAST Content Team


Being a parent comes with a price tag. If you want the best education for your child, someone has to pay for it. Considering the many factors that come into play, such as the tuition fees, accommodation costs, books, and other expenses, it is impossible to predict what the cost of education will be by the time your child is ready for it. But, the general rule of thumb is that the tuition rates increase more than proportionately with inflation. Doing the math to come up with the 'figure' that will secure your child's future will probably have your eyes popping out. And it's going to be harder if your little angel sets her eyes on a university abroad.

However, as the costs increase, so will the amount you earn. And thanks to financial literacy, we are increasingly open to investing in equities, mutual funds, bonds, etc., moving away from traditional fixed deposits. However, with the higher risk component in market linked investments, the challenge is subject knowledge and expertise. Though Benjamin Franklin said "An investment in knowledge pays the best interest", in the current context it makes more sense to say 'knowledge (about) investments is in your best interest'! Mutual funds give us access to the knowledge of professionals who have the expertise in selecting the right investments across sectors. While this is no guarantee against market volatility, it allows us to expect a reasonable return on our money if we choose our funds well and stay invested consistently.

So how do we choose the right funds for an education nest egg? Your options depend on the age of your child/children, the risk you can afford to take, the return you expect and the liquidity you need during the time of investment.

Parents of primary schoolers, lend me your (y)ears

People who can see beyond 10 years always have an edge over people who don't. To gain from the full power of compounding, you need time and patience. If your child has just started school, it is wise to start with SIPs in mutual funds based on your income (ranging from Rs. 1000 – 10000 per month) hiking the contribution rate by 10 - 20% every year. Considering you have enough time to take risks, your portfolio can have more equity funds and less of debt funds. It is your time to be in the aggressive or the moderately aggressive portfolio bracket. However, it is wise to review your funds every year, and move out of non-performing funds if they have not done well for three years.

Middle school moms and dads, time to get serious

At this stage, you an investment horizon of 5-7 years, which means you cannot be as aggressive as parents with younger children. However, this is a good horizon to explore large and multi-cap funds with a small allocation into mid cap and small cap funds. If you prefer to work with lower risks, monthly income plans (MIPs) are a conservative option, but with much lower returns. Since these funds invest only a portion in equities they are less volatile than equity or balanced funds. It is worth noting that the dividends from equity and balanced funds are completely exempt from tax. And so are long term capital gains if the holding period is more than 12 months. However, the gains from MIPs are taxed at 20% after indexation benefit, if it is held for more than 36 months. On the other hand, a holding period of less than 36 months in MIPs will mean that the gains will be taxed as per the income slab.

Parents of teenagers, be on guard

At this stage, you cannot afford to take risks with the money accumulated. You are now in the conservative risk bracket. A sudden downturn in the equity markets can reduce your wealth by 5-6% and upset your plans. Therefore your allocation to equity funds should not be more than 15%. Gradually in the final 2 years before the achievement of your goals, route your investments into a short term fund for 1.5 years and finally move the entire surplus into ultra short term funds. Use the dividend option if you are in the 30% tax bracket.

Check out our recommended portfolios for various risk appetites and investment horizons, explained fully with suitability to various investment goals.

Bottom line

A recent survey by ASSOCHAM highlights that the cost of education has gone up by over 150% in the last ten years, becoming a major cause of worry for parents. Majority parents spend more than Rs. 20 lakh on average in putting their child through high school. To avoid finding yourself on a downward slope, be wise and invest well. And always have a plan B, so that an unexpected event should not shatter your child's dreams.

Disclaimer: iFAST and/or its content and research team's licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's scheme information document including statement of additional information. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer on the website.

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