It is rightly said that every parent’s dreams, hopes, aims and aspirations manifest in his/her child. As the child grows, the hopes blossom into ambitions and a premium education from premier institutions forms a critical component of parental aspirations.
However, this is easier said than done as it is estimated that in India, inflation in the primary and secondary education sector is around 12% and in the higher education sector, it is around 16-20% which again differs based on the institution and the course offered.
With fee structures of educational institutions (right from the primary grades) hitting the roofs, inclusive financial planning for funding the future educational goals of children has assumed paramount importance.
The goals of generating funds for meeting future education costs can be attained through realistic investment planning and keeping the future cost close to actuals. A key investment tool which can help in accumulating a huge fund base through timely contributions at regular intervals over a longer time frame is the Systematic Investment Plan (SIP) in mutual funds.
Investing through mutual fund SIPs is the best way in investing in the equity market as they effectively result in value investing in both the bull and bear markets with the dual benefits of compounding and cost averaging, respectively.
Equities have a proven track record of delivering returns beyond 14-15% over a longer time period. Data has shown that in India, over a 15-year investment period, the average returns delivered across 80 mutual fund schemes is around 18%.
For the first-time investor, SIP is an investment method in which investors choose to invest a fixed sum every month on a pre-selected date in a mutual fund scheme, and for a pre-defined period (which ideally should align with number of years to reach the goal).
Since investment happens every month, it eliminates the risk of timing the market. When the price of the selected mutual fund unit, technically called as Net Asset Value (NAV), goes down due to the drop in market value of portfolio, the investor buys more units. When the price (NAV) goes up, investor buys lesser units, thereby achieving a better Average Purchase Price over the investment tenure.
Parents can chart a well-planned investment plan, well in advance for their children’s education by calculating the present average cost of education, the expected future cost (at certain inflation rate) and start investing towards that.
The advantage of starting early is that one can start the initial investment with a nominal amount, which can assume exorbitant proportions, if delayed by say three or five years.
Let us take an illustration to see how one can build a sizeable corpus over an extended period of time to fund the educational expenses of children.
Arithmetic shows that if one wants to build a corpus of Rs 30 lakh in 16 years, one needs to invest Rs 4,160 per month in an investment that grows at 15%. If the same is delayed by two-and-a-half years, the monthly investment requirement goes up by 50%.
Timely planning, investment discipline and dedicated goal-setting are the buzzwords to garnering the requisite funds for children’s education.
The thin line between potential dreams and real-life possibility of seeing your children pass out with flying colors from top-notch education institutions is a well-planned investment initiative. So, stop dreaming and start investing.
(The writer is Associate Director of Geojit BNP Paribas)
Published 10 July 2016, 17:59 IST