Priority 4: Child education Plan - Sumit Khedkar

Priority 4: Child education Plan

 

Child education is one of the biggest goals of parents these days because of the tough environment and high expenses involved. These days most of the parents want to send their kids abroad for higher education. In today's value abroad education costs nearly 40-50 Lakhs Rupees, after 15- 20 years the cost will be much higher. If you do not plan for this early then you will have to shell out your life time savings for child education. Similar to the pension planning here also, the important thing is, your child education plan must beat the inflation. Hence we will evaluate all available options considering the inflation in  mind.

 

Investing all amount in the high risk instruments can jeopardize your kid's dreams therefore you must balance the investments between the high risk high returns instruments and the low risk guaranteed returns instruments.

 

Like pension plans there are number of private players in child education planning too. But, all of them offer nothing but a mutated version of  ULIP as a child education plan. Having said that, let's see what the private players are offering us.

 

I got following illustration form one of the leading private companies' website.

 

The takeaway from this illustration is as follows.

Total money you will be investing in this plan in the span of 23 years is 29,420 * 23 = 6,76,660 Rs

And the guaranteed returns after 23 years are 6,90,000 Rs. It is almost 0%. I wonder, how  one can secure his child educational aspirations with this kind of a plan. If you ask these private companies about the dismal returns of their investment plans then they say we offer you insurance benefits with these plans!!! Insurance benefits what the hell!! I need money for my child education, I can better insured myself with other pure insurance plans.

Your child dreams can never be secured with these kind of plans. One should never go for this option.

Design your own child education plan:

Option one: Using a PPF account (Public provident fund account):

 

Do you know, you can open a PPF account in the name of your child. If you open a PPF account for your kid and invest 29,420 Rs in it annually then after 23 years you will get total 21,44,455 Rs. And this is 100% guaranteed.

 

Year	Mode Of Investment	Amount Invested	Percentage returns	Amount At Maturity
1 To 23	PPF	29,420 Rs (Annually)	8.7%	21,44,455 Rs
	Total	6,76,660 Rs (Total)	8.7%	21,44,455 Rs (Total)

 

As compare to the private bank's child education plan your own plan is giving you 350% more returns. 

Option two : Using a PPF account and mutual funds:

 

In long run mutual funds give you around 15% year on year returns. As horizon of a child education plan is 15-20 years you get a long time period to maximize the returns using mutual funds.

You can optimize the performance of your child education plan by investing partially in PPF and partially in mutual funds.

Let's see, how much benefits do you get if you invest 50% of the amount in PPF and 50%  of the amount in mutual funds.

Year	Mode Of Investment	Amount Invested	Percentage returns	Amount At Maturity
1 To 23	PPF	1,225 Rs (Monthly), 14,710 Rs (Annually)	8.70%	10,71,790 Rs
1 To 23	Mutual Funds	1,225 Rs (Monthly), 14,710 Rs (Annually)	15%	29,23,724 Rs

The above table shows you that if you follow this plan then you will get total returns of 39,95,514 Rs out of which 10,71,790 Rs are 100% guaranteed.

You may have a question that if in long run I am going to get 15% returns from mutual funds then why not invest in the mutual funds only? My view is, the history tells us that mutual funds give good returns in a long run, however it is not guaranteed, the returns may vary. In case of child education plan and pension plan we need some guarantee. The fate of your child and your retirement life depend on the child education plan and the retirement plan you choose.

Hence, I prefer a hybrid investment plan consists of guaranteed return instruments and high risk high growth instruments. How much to invest in each instruments in the hybrid plan is totally depends on your risk appetite. If you are like me then you will prefer to invest major chunk in guaranteed return instruments.