Investment Options For Kid's Education: Case Studies
Making the right investment for your child's higher education isn't child's play. Financial advisors can guide you on how to go about choosing the right investment vehicle.
By Dr A V Senthil
Thanks for the overwhelming response for our previous article, How to Save and Invest For Your Child’s Higher education. Based on your feedback, in this article, we will focus on how to secure your child’s education and the factors you need to consider while making investments. We shall also look at few case studies to help you understand, how successful parents went about it.
Here's our 11-step approach to help you begin the investment process and successfully complete it.
- Identify the top two financial goals for your child: From a parent’s perspective, the top two goals are education and marriage.
- Today’s goal value: Make an estimate of how much it would cost you today to achieve these two goals. Let's assume Rs. 10 lakh.
- Time horizon: The year in which you would need the money. Let's say 2029.
- Factoring inflation: In our earlier article, we had underlined that education costs increase by 8% in India.
- Future cost of goal: Assuming an inflation rate of 8% for the next 10 years, the future cost of the education would be Rs. 21.6 lakh (10L × [1.08] ^ 10).
- Know your risk tolerance: It is important to assess your risk tolerance levels. Are you aggressive (accept erosion in capital between 21% and 30%), moderately aggressive (between 11% and 20%), moderate (between 6% and 10%), moderately conservative (up to 5%) or conservative (no downside risk – full capital protection)?
- Match investment products: Depending on your risk tolerance, you should look for investment products, based on volatility. Government instruments provide capital protection, but liquidity may be a challenge for products like public provident fund (PPF) or Sukanya Samriddhi Yojana (SSY). Financial advisors (and coaches) can help you to choose the right investment vehicle. Remember, the higher the volatility, the higher the returns. If you are moderately aggressive, you can assume that equity investments will give returns of 10% CAGR (compounded annual growth rate) over a 10-year period. Real estate may be an attractive investment option, but comes with liquidity risk. Bank fixed deposits (FDs) at 8% interest seem good enough, but comes with reinvestment risk. Bank FDs come with a capital protection of 1 lakh per investor.
- Investment approach — one-time or recurring: Depending upon your income, you should decide which approach suits you. For example, if you are cash rich, all it takes is Rs. 8.3 lakh today (and not 10 lakhs) to meet the education goal of Rs. 21.6 lakh (8.3 × [1.10] ^ 10). But, if you’re a salaried professional, you need a monthly investment of Rs. 10,500 (You can use MS Excel - PMT function to get this number 10,500) to generate the required corpus of 21.6 lakh.
- Cost of delay or inaction: Around 95% of investors fail in this aspect. They know what they should be doing, but procrastinate. A delayed start of systematic investment plan of Rs. 10,500 by 1 year means that your corpus at the end of 9 years is Rs 18.3 lakh, and not Rs. 21.6 lakh. This is a whopping difference of Rs. 3.3 lakh and not Rs. 1.26 lakh (10,500 × 12).
- Periodic review: Having started your investment journey, it’s important to review your portfolio at least once a year (not daily, monthly or quarterly). Financial advisors will provide insights on your asset allocation (across debt, equity, and real estate) to meet all your life goals.
- Tax efficiency: Look at those products which are tax efficient. Look for an advisor who can give you holistic advice including tax aspects. Investing in Fixed / Recurring deposits are not tax efficient.
Let's look at a few case studies to understand how some parents managed to achieve their investment goal. But, before that, I would like to share a few details about myself. I started my career as a Consultant with a consulting firm in 1991, and then moved to one of the top three information technology (IT) company in 1992. I worked with this organisation for about 16 years and then shifted to multinational IT firms for another 8 years. Being a finance professional (cost accountant), during this period, I closely observed on what my close friends were doing on the investment front. From the vast list of friends that I observed, I would like to share with you the following five case studies.
Case study 1: A very conservative IT professional started investing every month in PPF and bank recurring deposit (RD) immediately after the birth of his child in 2002. Being a salaried professional, he could invest Rs. 12,500 a month for a period of 16 years continuously. So, his investments in PPF and RD totalled Rs. 24 lakh (Rs. 12,500 per month × 12 months × 16 years). When I checked with him earlier last month, his total corpus was about Rs. 48,72,000. A very decent corpus to fulfil his child’s dream.
Case study 2: Another individual, whose first child was born in Q4 of 2001, decided to invest a sum of Rs. 5,000 per month in a mutual fund equity linked savings scheme (ELSS). He continues to do so. His total investment in mutual funds was Rs. 9.6 lakh (Rs. 5000 per month × 12 months × 16 years). Today, the value of his investment is Rs. 39.9 lakh. In the years 2008, 2012, and 2016, although his mutual fund investments were valued less due to the stock market crash, he remained calm and composed, thanks to the investment advisor who hand-held him through the tough times.
Case study 3: This is another interesting case. A friend of mine from Vellore, Tamil Nadu, belonging to an upper middle class family, got married in the year 2000. He pooled together all the gifts he had received on the occasion of his marriage, including the contributions from parents and in-laws, and invested in a liquid mutual fund, which offers better returns than a bank saving deposit. He wanted his capital to be protected but the dividends to be invested in the equity scheme. While writing this article, when I checked with him on the value of his investment, he mentioned that the corpus in liquid scheme was Rs. 10.32 lakh (which means capital is protected) and the equity investment was valued at Rs. 86.15 lakh. So, the total value of the portfolio is Rs. 96 lakh. When he began investing, his equity exposure was 0%, but now he has garnered a huge corpus, which also gives a good tax-free return, adjusted for inflation. On top of it, this investment offers him easy liquidity. Looking back, I feel that I missed this opportunity and investment strategy.
Case study 4: This friend of mine loves to invest in real estate. He bought a DTCP-approved plot (2400 square feet) somewhere near Porur, Chennai, for Rs. 5 lakh in the year 2002. Last year, he sold this piece of land for Rs. 60 lakh. Thus, with just Rs. 5 lakh, he was able to cover the cost his child’s education!
Case study 5: All of us switch jobs. One of my friends also switched jobs and settled in the US in 1998. He received a bonus of USD 10,000 (around Rs. 5 lakh as per the conversion rates then). In 2002, he invested the same amount in his company stock. The value of this investment today is USD 4.43 lakh (Rs. 3.14 crore, assuming an exchange rate of Rs. 71 per USD). That is the power of direct equities!
From the above table you can understand that it only takes a one-time investment of Rs. 5 lakh to plan for your child’s education. Alternatively, you could invest in a disciplined manner in a mutual fund, bank or post office instruments.
Today, most of the information is available for free. We are bombarded with information through articles, Whatsapp, media, robo advisors, marketing calls from bank / relationship managers and so on. But what you need is a reliable advisor (or qualified expert) to understand your requirements, create a custom solution and help you to implement & track the progress.
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Happy Parenting and Happy Investing!
Disclaimer: The views expressed in this article are those of the author. You can reach him at firstname.lastname@example.org and through Whatsapp at +91-98416-71678 for any clarifications.
Dr AV Senthil is currently working at Metis Family Office and heads Wealth Advisory and Mentoring services. He works closely with clients to build, manage and protect wealth effectively and efficiently. He brings in a comprehensive value-add for various components of wealth (real estate, liquid assets, REITs, gold etc.), in terms of analysing their current portfolios, managing their existing set of investment advisors, developing a comprehensive MIS, review mechanisms and drafting investment policies.
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