Funding your kid's education: Start now, and invest consistently to gain in the long-term

Recently I came across an advertisement in a magazine by a gold loan company, offering loans to fund a child's school education. For a moment I went back in time. Some of those good old Hindi movies used to depict a scene – the Mother of the hero would offer her gold ornaments to pay off some loan or to raise money. Though decades have passed, and we have seen a phase of massive economic growth after we opened our economy in the early nineties, still we come across such advertisements offering loans for school education.

Loans are not uncommon for us. Borrowing money for splurging is considered a sign of poor money management. Should one borrow for school’s education is a topic of debate. But rarely people think two times while borrowing for funding higher education. Borrowing money for higher education or purchase of a house is considered a good loan because these are deemed to be investments for a better tomorrow. Education is a necessity in the modern world along with food, clothing, shelter, healthcare, and the internet.

Providing the best-in-class education to kids is a dream for most parents. However, that does not mean it should be funded with borrowed money. A more nuanced approach is to plan this expenditure well in advance. Let us address this in detail:

Funding education must start with estimation of expenses. While it is easy to estimate near term expenses such as schooling related expenses, it is difficult to estimate expenses in the long term – say for higher education or MBA overseas. School-related expenses can be funded with simple products such as recurring deposits. There is little scope to take market risks as the time is usually short. So, a one-year or two-year recurring deposit with a bank can come in handy. If you are keen on a bit higher return, then recurring deposits issued by large housing finance companies such as HDFC or reputed non-banking finance companies can also be considered.

Estimating expenses for higher education need to be done with utmost care. You need to account for inflation. For example, an MBA at reputed IIM Ahmedabad, costs Rs 24.61 lakh for the 2022-2024 batch. If you think your kid will enter this institution after 20 years, then at 6% inflation, the course will cost you Rs 78.93 lakh. Once you get the future value of the course, you have to work backwards. For instance, to create a fund amounting to the fees of Rs78.93 lakh for an MBA at IIM Ahmedabad, you will have to invest Rs 7900 per month in an investment avenue which will fetch you 12% rate of return.

Not everyone aspires for top-notch schools. There may be some who may not be cut out for those schools. But the cost of education is going up. Many times, parents decide to fund their kids’ education using traditional avenues such as accumulated corpus in Employees Provident Fund or Public Provident Fund. The only downside with these investment avenues is – they are fixed income-oriented investment vehicles. This means they offer around 7-8% returns in the long-term. The situation becomes tough if these are the only means to fund their retirement. Dipping into your retirement kitty for your kids’ education is compromising with the most vulnerable phase of your life: retirement.

Before we look at what works, let us also understand that all traditional life insurance policies offering fixed income like returns are also of no use.

A sensible thing to do is to build an education fund using products offered by mutual funds. It is better to start early and start investing in multi-cap equity funds or flexi-cap equity funds. Even a small allocation to small cap equity funds can be considered if you have a long enough time on hand – typically more than a decade. An allocation to children’s plans launched by mutual funds can also be considered. Since these schemes allocate money to stocks, their returns are volatile and hence it makes sense to invest through Systematic Investment Plans (SIPs) or Systematic Transfer Plans (STPs).

There is a possibility that you may not be aware which course your kid will decide to study. Hence, you may not get an estimate of the corpus requirement right. But you can choose to be ready with some funding in place. If you wait for your child to decide on a course, it may be too late for you to arrange funds. You may earn less returns on your corpus or you may invest less than what you planned for due to one reason or the other. Even in that case you will have a sizeable corpus in hand in the long run. A shortfall if any can be made up with an education loan, which can be serviced by your kid after he or she starts working.

Disclaimer: This report is prepared in his personal capacity and neither the Author nor Money Honey Financial Services Pvt Ltd assumes any responsibility or liability for any error or omission in the content of the article. Investments in mutual funds and other risky assets are subject to market risks. Please seek advice from an investment professional before investing.