Building a corpus for children’s education

Start saving early and invest in the right asset

Planning a family is not just about preparing oneself mentally and getting the infrastructure support to raise children. The most important part of it is planning your finances to cater to the needs of your children at different stages of their life. The first step towards that is ascertaining the goals and building a corpus to ensure that one has adequate resources to take care of their future needs such as basic and higher education, marriage.

Building a corpus for education is critical, given the spiralling cost of education in India. Saving enough and investing it in the right asset class early on is important to ensure that one has the requisite corpus to support their children’s education.

Chennai-based Chandrasekar wants to build a corpus to support the higher education needs of his two sons Pranav and Pratik. The 40-year-old IT professional’s wife Valli, 37, is also employed and their net family income (after deductions and tax) is ₹1.7 lakh a month. The older son Pranav is seven years, while Pravin just turned five.

“We recently took a housing loan for ₹50 lakh to buy an apartment in which we currently live. The monthly instalment on the home loan is ₹43,391”, explains Chandrasekar. Their monthly family expenses is ₹50,000. The couple have a life insurance term cover of ₹2 crore in total, provided by their respective employers.



Higher education



Chandrasekar had to dip into his savings for his home purchase and, hence, their current total savings stands at ₹20 lakh, in the form of bank deposits. The current cost of higher education (under graduation in a top-ranking institute and post-graduation abroad) is ₹50 lakh. And the family will need the equivalent of ₹50 lakh today ten years from now, for their first son’s education. If we assume the cost of education to increase by 5 per cent every year, the corpus required at the end of ten years is ₹77.6 lakh .

Likewise, for their second son Pravin’s higher education, the current requirement of ₹55 lakh that will translate into ₹94 lakh by 2029.



Choice of investment



Given that the capital for the first son’s higher education will be required only ten years from now, the couple can consider investing in a combination of large and mid- and small-cap oriented equity schemes for a period of, say, seven years and then move it to debt-oriented funds at the end of the seventh year. That way, they can ensure that they can reduce risk to some extent. Also from a tax perspective, debt mutual funds are more efficient compared to FDs or other conventional fixed interest instruments.

Assuming an average annualised return of 12 per cent on the investment that they will make over the next ten years, Chandrasekar and Valli will need to invest ₹31,146 every month over the next nine years to mop up ₹77.6 lakh for their elder son’s education.

Likewise, for the second son’s education, the couple will have to set aside ₹25,074 every month as investment into equity mutual fund schemes, keeping annualised return expectation at 12 per cent and cost inflation at 5 per cent. For the second son, given that the time to reach the goal is 12 years, they can consider parking the money in equity mutual funds for nine years and shift to debt mutual fund schemes for the last three years.

The couple can consider parking the balance monthly surplus of ₹20, 389 in an equity oriented balanced fund which will not only contain downside well during market declines but will also provide upside during rally phases. They caninvest in balanced funds with a good performance track record such as HDFC Balanced (17 per cent since launch), L&T India Prudence Fund (15 per cent annualised return since inception).

Factoring in an annualised gain of 12 per cent, Chandrasekar and Valli should be able to have a corpus of at least ₹2.3 crore at retirement. Given the soaring cost of education, it pays to start planning early and use the equity route to building long term wealth.

The writer is co-founder, RaNa Investment Advisors

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