The fees for class of 2017-19 batch of IIM-Ahmedabad will be Rs. 21 lakh for the two-year MBA course. Laptop computer, personal expenses on boarding, travel, clothes and laundry are extra. https://www.iima.ac.in/web/pgp/apply/domestic/expenses
This is 400% higher than what the B-school charged in 2007. If the fees of the management course continues to rise by an average 20% every year, it will cost roughly Rs. 90 lakh in 2025.
At an average running inflation rate of 10%, a four-year engineering course that costs Rs. 8 lakh today is likely to set you back by Rs. 17 lakh in eight years’ time. By 2030, the same would cost more than Rs. 30 lakh. For engineering and medical aspirants, the costs start even while the student is in school. Coaching institutes charge between Rs. 80,000-1 lakh a year to prepare students for the entrance exam.
Higher education costs have the highest inflation rates. Parents need to realise it is going to be an expensive affair. Our story is aimed at parents who are saving for their children’s education. The investment options before them will depend on the age of the child. Herebelow are some investment options for three broad age groups and the strategies that could be appropriate for them. However, please note that each case would be unique and investment strategies may be different for each of them.
Higher education costs may be rising at a fast clip, but Delhi-based Kumars are not perturbed. They are saving for their son’s higher education. They started small last year with SIPs totalling Rs. 5,000 in three mid-cap equity funds. If they continue with that amount and their funds earn 12% a year, the couple would have Rs. 20 lakh by the time four-year old son is ready for college. But Kumars have a strategy in place suggested by their investment adviser. “From this year, I have increased my SIP amount to Rs. 10,000 a month. We plan to keep increasing this every year as our income goes up,” they say. If they hike the SIP amount by 20% every year, they will accumulate over Rs 1 crore in 13 years.
The benefits of an early start cannot be stressed enough. The multiplier effect in the power of compounding comes from the investing time horizon; longer time horizons have a higher multiplier effect. Starting early also put lesser burden on your finances because it requires a smaller outflow. Worse, you may not be able to invest in certain assets if the time horizon is short. If you delay investing, it reduces your ability to take risks.
The investment strategy changes if your child is a little older. Since you have only 5-9 years to save, the risk will have to be lowered. The asset mix at this stage could be balanced in stocks and in debt. Go for funds that invest in a mix of stocks and bonds. If your risk appetite is lower, monthly income plans (MIPs) from mutual funds can be a good alternative. These funds put only 15-20% of their corpus in equities and are therefore, less volatile than equity or balanced funds. However, the returns are also lower.
If you do not have any affinity to equities, start a recurring deposit that would mature around the time your child is scheduled to apply for college. If you are in the higher tax bracket, avoid RDs and start an SIP in a short-term debt fund. These funds may give slightly better returns than FDs but are more tax efficient.
It is also important to review the progress of your investment plan. Keep monitoring the cost of education on a yearly basis and accordingly adjust your investment requirement.
For parents of teenaged children, the investment strategy should focus on capital protection. With the goal barely 1-4 years away, you cannot afford to take risks with the money accumulated. The equity exposure at this stage should not be more than 10-15%. Kolkata-based Sanyals started investing in a mix of mutual funds for their daughter’s college education 12 years ago. But now that the goal is just a year away, they have shifted the corpus to ultrashort debt funds as advised by their investment adviser.
This shift from growth to capital protection is critical. The additional 4-6 percentage points that equity investments can potentially give is not worth the risk. A sudden downturn in the equity markets can reduce your corpus and upset your plans.
As mentioned earlier, the cost of higher education is shooting up. Many parents who started late or chose the wrong investment vehicles may find themselves woefully short of the target. If you face a shortfall, don’t be tempted to dip into your retirement corpus to fill the gap. This is not a correct move. Your retirement should be given priority over your kids’ education. Instead, you could take an education loan with the child as a co-borrower. Let them pay the loan when they start earning.
Apart from keeping your retirement savings intact, it will inculcate a savings discipline in your child after they take up a job. The repayment starts after a 6-12 month moratorium when they complete their education. Banks offer loans of up to Rs 20 lakh for courses in Indian institutes. If your child is keen on a foreign degree, it would require a larger corpus. While banks are willing to lend up to Rs 1.5 crore for foreign courses, they insist on part funding in the form of a scholarship or assistance.
When saving for your child’s education, remember that the financial plan depends on regular contributions. But what if something untoward happens to you? The entire plan can crash. The only way to guard against this is by taking adequate life insurance. A term plan does not cost too much. For a 30-35 year old person, a cover of Rs 1 crore will cost barely Rs 10,000-12,000 per year. That is too small a price for something that safeguards your biggest dream.
The benefits of having an advisor and creating a financial plan helps you see the big picture and set long, medium and short-term life goals, a crucial step in mapping out your financial future. When you have a financial plan, it’s easier to make financial decisions and stay on track to meet your goals.
References: IIM-A, TOI