With costs for higher education increasing rapidly, parents must plan an investment strategy early depending on the age of the child
For a country that is set to become the youngest nation in the world by 2020, providing quality education is already a challenge with even premier institutions suffering from lack of quality faculty members and resources. The condition tier-II institutions are worse. Add to this mounting costs of higher education. The cost for a two-year MBA course from a premier management institute, like the Indian Institute of Management, Ahmedabad, has been increased by 400 per cent this year as compared to 2007. If this trend continues and the fee is hiked by an average of 20 per cent every year, by 2025, it will cost roughly around Rs 95 lakh for a student to get an MBA degree. Even undergraduate courses have not been spared. Tuition fees for engineering courses in the Indian Institute of Technology have been hiked to Rs 1,17,000 per semester with the total cost, including living expenses, going much higher. At an average running inflation rate of 10 per cent, a four-year engineering course that used to cost eight lakh rupees some years back will likely be around Rs 30 lakh by 2030. In fact, for engineering and medical aspirants, costs are high even when the student is in high school. Coaching institutes charge anywhere between Rs 80,000 to one lakh rupees per year to prepare the student for the entrance exam.
It is also true that a majority of students are unable to get admissions into premier institutions and, hence, have to look for other options. With a rise in globalisation, foreign education, too, has emerged as a strong option for Indian students with the Indian student community being the second largest worldwide after the Chinese. The US, the UK, Australia, Canada and Germany are some of the top destinations where Indian students opt to study to gain exposure. In the US, the tuition fee is usually between $5,000 and $50,000 per year. Costs for food and living are normally between $8,000 and $12,000 dollar per year. In addition to paying the tuition fees, one also needs money for transportation, course literature and personal expenses which shoots up to somewhere between $30,000-$75000 per year now. And with unpredictability surrounding the value of the rupee as compared to the dollar, it has become all the more important to plan well in advance for the higher education of our children. The kind of investment options available for parents depends on the age of children. If a child is three to four years old, investment choices and strategy will be different from those parents whose child is 15-16-year-old.
However, the benefits of an early start cannot be stressed enough when one is saving for a long-term goal. If the child is three to four year old, parents have good 13-14 years in hand to save. Starting early helps one amass larger sum that may not be possible later in life. The multiplier effect in the power of compounding comes from the investing time horizon; longer time horizons have a higher multiplier effect. Mutual funds are a good option for investment. However, since the money is for the higher education of children, one must abstain from taking undue risk and, instead, invest in safer options even though returns could be lesser. The investment strategy for a young child, say three to four-year-old should have more of equity component as the period of investment is longer. As the child grows, it will be wiser to convert the equity portion to debt component to safeguard the capital against stock market fluctuations.
However, investment strategy changes when the child is a little older. Since the number of years to save is less, risks will have to be lowered. The ideal asset mix at this stage is 50 per cent in stocks and 50 per cent in debt. Instead of equity funds that invest the entire corpus in stocks, one must go for balanced funds that invest in a mix of stocks and bonds. A recurring deposit in a bank could also be opened with the target monthly saving and the maturity date. Monthly Income Plans are also available for parents who have lower risk appetite. These funds put only 15-20 per cent of their corpus in equities and are, therefore, less volatile than equity or balanced funds. However, returns are also lower than those of equity. For parents of teenager, investment strategy should focus on capital protection. With the goal being barely one to four years away, one cannot afford to take risks with the money accumulated for the child’s education. Equity exposure at this stage should not be more than 10-15 per cent and investment should be a mix of a small proportion of mutual funds and more of bank deposits. So, the kind of investments depends entirely on the age of the child. However, it is prudent not to take an undue risk for some potential higher returns which in turn can lead to the erosion of capital due to unpredictable markets.
If one has not planned well, he/she could get a rude shock, falling way short of the required corpus when the kid is ready for college. However, if one has fallen short of college funds, he/she should never make the mistake of dipping into retirement funds. It is better to take an education loan making the child a co-borrower, which will also inculcate the habit of saving in a child and he/she would end up taking his studies seriously.
(The writer is Assistant Professor,Amity University)
