Saving for your child’s higher education

Large-cap schemes with a good track record of containing downsides can be considered

Parenting is not just about taking care of the child’s emotional needs; its is also about securing the child’s future financially. For Lucknow-based Lata Sharma, 40, who is a single parent, the responsibility doubled since her husband’s demise four years back. Besides attending to her 14-year old son Arya Sharma’s emotional needs, she also shoulders the responsibility of securing his financial needs. Lata Sharma works as a lecturer in a college and her take home monthly salary is ₹35,000. The monthly family expenses amount to ₹17,000.

She currently resides in an apartment which was bought by her husband. Besides the home they live in, Lata Sharma has a corpus of ₹50 lakh, which is largely the death benefit received by the family. The same has been parked in bank fixed deposit schemes.

Investing appropriately

She has a term insurance cover provided by her employer and a family floater Mediclaim policy.

“I want to save money for my son’s higher education. I wish to send my son abroad for his post-graduate course and hence want to invest in the appropriate instrument” explains Lata Sharma.

The current cost of pursuing higher education abroad is about ₹45 lakh. Assuming an annual increase of about 7 per cent, the cost will be about ₹72 lakh seven years from now.

If Lata Sharma invests her current surplus of ₹18,000 in a diversified large-cap oriented equity mutual fund schemes with a potential to deliver annualised gain of about 12 per cent over the next seven years, the total corpus at the end of the seventh year will be about ₹29 lakh. This is assuming an annual increase of 8 per cent in the investible corpus.

Bridging the gap

To bridge the gap of about ₹43 lakh, Lata will have to invest a portion of the death benefit of ₹50 lakh in equity mutual fund schemes. She can consider parking ₹20 lakh in diversified large-cap oriented equity mutual schemes. Assuming an annualised return of 12 per cent, she should be able to get ₹44 lakh by the end of the seventh year.

Diversified large-cap oriented schemes with a good track record of containing downsides during downcycles such as Aditya Birla Sun Life Frontline Equity, Mirae India Opportunities (multi-cap fund with a large cap skew) and HDFC Equity Fund can be considered. These schemes have delivered between 17 and 20 per cent annualised over a five-year period.

Out of the balance corpus of ₹30 lakh (death benefit), Lata Sharma can consider investing Rs 20 lakh in equity oriented balanced funds and the remaining ₹10 lakh can be kept in fixed deposit schemes. Assuming an annualised return of 10 per cent in equity oriented balanced funds, Lata should be able to mop up a corpus of ₹1.35 crore by the time she turns 60. This will help meet family running expenses post retirement.

Lata Sharma can consider balanced funds with a good performance track record such as HDFC Balanced Fund, L&T India Prudence Fund and Principal Balanced Fund that have managed to deliver annualised return of 18-20 per cent over a five year period.

The writer is co-founder, RaNa Investment Advisors.

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