Irrespective of where we come from, what we are now or what we want to be, some aspirations common to all are those for our children’s future: a good education and a marriage performed and celebrated well. Further, in these competitive times, a first-class education is a ticket to a great future. Hence, we as parents are all the more keen that we should have enough funds to provide the best education to our children more than any estate or property.
While there are number of ways to accumulate the corpus required for this, the first requirement is to put down a number today for your child’s education. Consider the cost of a professional degree course and a post graduation from a good institution. Apply a rate for inflation on this, you can assume 6% - 7%, if your child’s education is 15+ years away. This is your target – work towards this.
Example: Let’s say an engineering degree from an elite college would cost Rs.10 lakhs ( if my child could not secure a merit seat). An MBA from one of the better institutes would cost Rs.15 lakhs. If my child is 2 years old today, then by the time she is 18, the engineering course would cost nearly 3 times this at Rs. 24 lakhs and the MBA would cost about 45 lakhs.
Now look at a combination of asset categories to build up your funds. Ideally they should have different risk-return patterns so that even if one category is going through a low cycle, the growth in the other asset categories makes up for it. Basically there should be sufficient diversification so that you are not over dependant on any one asset class – a judicious mix of equity and debt so that you have both safety and returns.
Equity should form a significant part of the portfolio. Over a 15+ year period, the returns from this asset class are probably one of the highest, in the range of 12% - 15% p.a. and hence are capable of taking on the double whammy of tax and inflation. So do consider the SIP, systematic investment plan into equities (either through Mutual funds and/or equities).
For most of us earning a salaried income, doing a lump sum investment is not possible. So a SIP offers a lot of advantages the main being the ease of investment. Most fund houses have an ECS facility for this investment and therefore these can happen every month smoothly. Further, since these investments happen at a fixed day of the month and for a fixed amount, one gets the benefit of rupee cost averaging. You don’t have to time the market and invest depending on being able to predict the ups and the downs successfully each time. Instead you purchase units of the mutual funds sometimes at a higher price when the markets are rising and sometimes at a lower price when the markets are falling, such that your average cost works out lower.
Open PPF, Public Provident Fund accounts in the names of your children at the earliest and keep putting money into these accounts year on year. Among the debt category of products, the PPF is one of the most tax efficient and offers a high rate of return at 8%.You can also look at real estate, say a plot or a property and keep this aside for this goal. Over the years once this has grown to good potential it can be liquidated.
For the child’s marriage, it would be prudent to buy gold and silver in pure form (biscuits or coins) from time to time when there are serious dips in the prices/systematically starting today in small quantities so that closer to the child’s marriage these can be converted to ornaments and articles required for the marriage.
Whatever has been discussed above is contingent upon your future earning capacity. Only if you are there and you earn a certain sum will these investments be possible. But what if something was to happen to you and your family is left behind with all these aspirations incomplete. It is for this that INSURANCE has to be a vital ingredient in the asset mix. Insurance will ensure that even if you are not there, your child’s education or marriage will go on as planned. It is the only instrument which can bridge the gap between income and the goals.
So look at an insurance plan. You can either take a ULIP so that you get the benefit of equity returns combined with a life cover. Or you can take a term plan and do most of the investments according to your desired asset allocation.
Lastly, keep evaluating the performance of the various investments to get the best out of them and when the goal is a couple of years away do move most of the assets to cash or near cash form so that any depressions, falls do not erode the gains made so far.
The author Lovaii Navlakhi is a Certified Financial Planner and Managing Director of International Money Matters Pvt. Ltd.