How to manage the unpredictable costs of your child's education?

The days of parents deciding their child's profession on the very day they are born are more or less in the past. These days, children are increasingly deciding what they want to study based on their aptitude and interest. That's more power to children, but less certainty for a parent. Will their child pursue medicine, a creative field or even want to study abroad? Each path has unique financial demands, and even slight changes can dramatically alter the child's higher education cost. The below table illustrates why:

How to combat uncertainty

Since education costs and your child's career interests are unpredictable, it's best to have a flexible plan by sticking to the following rules:

• Keep a buffer. Aim for a little more since you can't pinpoint the exact cost. If you're targeting Rs 20 lakh, consider setting a goal of Rs 25 lakh.
  
• Increase your SIPs over time to keep up with education inflation.
  
• Revise your target based on your child's interests. As their interests and abilities become apparent with age, re-evaluate your target to reflect the field they're likely to pursue.

Starting early makes a difference

The earlier you start investing, the more you benefit from compounding . This allows your savings to grow with a smaller monthly commitment. The below table is a good example. If you start investing today, you can start a monthly SIP in a mutual fund for Rs 5,759 to accumulate Rs 50 lakh in 15 years, provided the investment grows at 12 per cent annually. But if you start after five years, the monthly SIP would swell to Rs 14,820.

Where to invest for child's higher education

A balanced approach with both growth-oriented and stable investments is essential.

Diversified equity mutual funds , such as flexi-cap funds , are ideal for long-term goals, as they typically outpace inflation, offering significant growth. Do note that child-specific mutual funds are essentially hybrid funds with no unique benefits. In fact, they may charge higher fees and have less flexibility. So, stick with a diversified equity fund.

For the more defensive side, consider the Public Provident Fund (PPF) and Sukanya Samriddhi Yojana (SSY). They offer stable, tax-free returns backed by the government. However, avoid relying solely on these options, as their fixed-income nature may not keep pace with rising education costs. They work best as a conservative part of your portfolio, supplementing equity investments.

It's also wise to avoid ULIPs, which often come with high charges and limited flexibility, making them less effective for both investment and insurance.

Plan your exit

As you get closer to your target date, it's crucial to protect your accumulated money from market risk. So, reduce your equity exposure two to three years before you need the money.

Use a systematic transfer plan (STP) to gradually shift from equity to safer debt options, such as a debt fund.

What if you don't reach your goal?

If, despite your best efforts, you find yourself short of the full amount needed, taking a small education loan can help bridge the gap. Additionally, a modest loan can also teach your child the value of money, making them more disciplined and financially responsible.

To sum up

Planning for your child's education is more than crunching numbers. Parents have to adapt on their feet. So, start early, stay flexible and revisit your plan regularly. You'll be well-positioned to support your child's aspirations, no matter where their dreams may lead.

Also read: Should you invest in your child's name?

This article was originally published on November 14, 2024.