@Team ParentCircle Good evening Mr. Kasi. Happy to note that you are planning for daughter's higher studies abroad. My suggestion would be that she works for 1 or 2 years in India before she goes for higher studies. This work experience will help her to choose the specialization. Once she chooses the specialization (say IOT), then she can choose the best university based on Ranking. She has go get good scores in GRE, which she will. Irrespective of the country, its important that as a parent you plan to invest atleast 40K per month .
@Sriram J Hi Sriram, The answer is “yes” in most of the scenarios. Let me explain it with three scenarios: a) If I don’t have funds, I must take education loan, as no other option. The good news is almost all banks give education loans, but the interest rate differs. Let us assume the interest rate as 12% and 0% processing fees (you can get it waived). The maximum duration of education loan is 10 years. If you are a tax payer, you can claim the interest paid under section 80E. Assuming you are in 30% tax bracket, your effective rate of the loan is 8.4% (70% of 12%) and not 12% b) Let us assume that you have adequate funds and your investment return from the financial assets is 12% per annum from Direct Equities / Mutual Funds. Then in this case also, we recommend you to take a education loan, as you are able generate ‘alpha’ (additional return) c) In this Scenario, let us assume that I’m an IT professional and have all the money in Bank Savings Bank Account or Fixed Deposits, Recurring deposits, Liquid Mutual funds, where my investment return is less than 6% (net of taxes). Here, my suggestion would be avoid the education loan, and redeem the investments, as it makes financial sense. Taking a loan for pursuing Masters in Overseas, makes your kid more responsible, as your son / daughter, will know the value of money.
@Manoj Mootha Good question Manoj. Cost of abroad education depends on four factors – country, city, course undertaken, lifestyle expenses. As it is difficult to finalize all the 4 factors, my suggestion would be to assume the current cost as 2 Lakhs per month per kid. So you have to plan for 4 Lakhs per month. Suggest 2 Lakhs in a large cap equity mutual fund for the first hero. Whereas for the junior hero, you should look at 1 lakh being invested in a mid cap and another 1 lakh invested in a small cap mutual fund. Regarding professional entrepreneurship, it depends upon the capital requirements. Assuming your son is going to start a services business, then then capital required is much lower. For a manufacturing company, capital required will be high. Having said this, its too early to estimate. Suggest saving 1% of net financial flows on a regular basis in a small cap fund and this will create a good corpus when your heros want to start a new venture.
@Anonymous Very true and agree with you. Most of the parents will be saving only to get tax benefit, and most of the times the tax savings instruments are debt products like PPF or PF. I have two suggestions for you. First suggestion is to create a personal financial plan with the help of a financial planner (Today you can get this done for a very nominal cost) and second suggestion is to atleast save 20% of your take home salary every month and invest in a dynamic equity fund which invests in equity when its attractive and moves to debt when the equity valuations are high. This will help you to create a good corpus when you kid goes to college at 17 years. If you are a moderately conservative investor you can look at multi asset fund.
@Nithya Very happy that your question focuses on two types of investment s – Fixed and Variable returns. Assuming you have another 6 to 7 years for graduation, for the fixed part, you may look at RBI Bonds for 5 years if you are very conservative investor and have a lumpsum to invest. If you can take little risk, then suggest you invest in Debt Mutual Funds, which invests atleast 80% in AAA rated companies through one-time or a monthly SIP (systematic investment plan) route. For the variable return schemes, suggest large cap equity mutual funds. Investing on a monthly basis is a preferred option.
@Nithya Anand Good evening Nithya. Happy that you are having a specific goal and want to save for this goal on a monthly basis. Few questions before I answer your query – You want to send your kids abroad for Under Grad (or) Masters. Also which country you are planning to send. As it is too early to decide, my suggestion is to save atleast 10% of your net cash inflows towards this goal. When they cross the bridge, you will have a sizeable corpus.
@Vidyalakshmi Congratulations Vidya for being a responsible mom and want to plan for the twins education. Your hands will be full with on daily basis. My suggestion is you and your spouse reach out to a financial advisor and have a chat. This will provide lot of clarity on the money management front. Here is a good thumb rule – You should be spending less than 30% of your take home pay towards EMI, your overall expenses including kids education should be less than 50% and the rest should be towards savings. I hope you have taken term insurance to cover your liabilities (and commitments) and have done the basic stuff for estate planning (example writing a will).