A sound education is the most valuable gift you can give your child. Not surprisingly, children’s education is the primary concern of a majority of urban couples today. Rising costs and inflation mean parents need to plan well in advance and invest in the right kind of financial instruments so that they can achieve their goals in the long run.
Unfortunately, right intentions don’t necessarily translate into right decisions. Many parents either due to mis-selling or lack of awareness end up investing in the wrong kind of products such as Fixed Deposits, PPF (Public Provident Fund) and traditional endowment/money back insurance policies. These products are unlikely to beat inflation let alone help achieve your goals.
The only financial product which can help achieve these long term goals is equity, more specifically mutual funds. Even financial experts agree that equity is the best route. SIP is the best option if it is a small baby or a newborn as you can enjoy the twin benefits of higher returns and power of compounding during the accumulation phase. If you start early you need to invest a smaller amount per month. Also make sure that as your income increases every year your SIPs also increase proportionately. Any windfall gains like an inheritance or bonus can also be invested as a lump sum investment. However, if you delay investing you will have to invest a larger amount per month at a later stage and you will also have a lower risk appetite as your time horizon will be significantly lower.
The question that now arises is how we go about selecting an appropriate scheme. There a few guidelines parents should keep in mind. Always select a scheme that has been in existence for at least 5 years and has a proven track record. It should be a consistent performer during bull and bear phases and should not be very volatile in nature. The fund should focus on generating stable returns in the long run and not indulge in unnecessary risks.
There are a variety of schemes in the market such as large-cap funds, mid-cap funds, thematic schemes, fund of funds, sectoral, diversified and index funds. Experts generally advise parents to avoid thematic schemes as the funds have to be deployed over a long period 18-20 years. The best option is diversified large-cap fund as these funds have shown consistent growth and good returns in the long run. If parents don’t have much knowledge about stock markets and also have a low risk appetite they can opt for index funds which are passive in nature and considered as a cost effective option.
Parents must also ensure that they move the corpus to a safer avenue like fixed deposits at least three years before they actually need the funds. This ensures that the corpus is preserved and doesn’t fluctuate with the vagaries of the stock market.
Many parents who start investing very late or invest in wrong products find that they are woefully short of the required corpus to fund their children’s education. They are tempted to dip into their retirement corpus. However, financial planners advise against such a move. Retirement must be given priority over children’s education. Instead opt for an education loan with your child as a co-borrower. This will inculcate a habit of savings in your child and will also ensure your retirement funds remain intact. Today banks offer loans for Indian and foreign education and re payment begins only after the student has obtained a job.
Parents should also take adequate life insurance so that if anything untoward happens to either of them, their children do not suffer. If parents are unsure how to go about investing, they should seek the advice of a financial planner.