Building a sufficient corpus for the higher education of their children is an important goal for many parents. They want to do the best when it comes to their children. To do so, what strategy should they follow?
Dhirendra: Not much of a strategy will work here because it's a very complex thing. One is that the goal is far ahead in the future. Then you don't know how much you will need. The cost of higher education could vary vastly.
Suppose a child is preparing for Engineering and gets into IIT to which he has been aspiring, the parents would have been saving accordingly and there would be sufficient capital. However, if he does not happen to get through IIT and decides to join some other Tier-2 college, the cost would be somewhat similar or could even be less. But if he or she aspires to get an engineering degree from a foreign university, the capital required could significantly balloon. Then the parents' accumulation may or may not be a significant part of the cost.
Also, inflation in education costs has been far higher than economic inflation over the last 20-30 years. One reason for it could be the structural changes in education. Thirty years ago, it was more about hard work and there were limited options. It wasn't that costly. But now several options have come up. Things are extremely different now. Similarly, you do not know how these things will shape up in the coming years.
So it is very hard to predict how much money will you need. But it is always good to err on the side of caution. Prepare for as much as you can. Follow the basic rules. When the goal is many, many years away, invest in equity as much as possible and be regular. Being regular and starting early is very crucial to reap the benefits of compounding. If you are unable to save every month, form a habit of investing some money each year on the child's birthday. This practice if followed over 15-20 years can itself be considered as a yearly SIP.
And as you get closer to the goal, start moving your money to fixed income in a systematic manner so that you are not dependent on the market.
How about Sukanya Samriddhi Yojana (SSY)? Should one invest in it?
Dhirendra: Sukanya Samriddhi Yojana has a great advantage. It is backed by the government and is absolutely safe. You get a guaranteed return of around eight per cent and the principal is protected. But the problem is that it is not fast enough. These investments are meant for a duration of 15-20 years and over such a long period, equity has proved to be the best asset class.
SSY is a completely fixed-income product. It is good for people who are extremely risk averse and very pessimistic; people who have no confidence in equities; or for people who are living in remote areas and do not have access to online banking. They can simply go to the nearest post office and invest for their child. It is better to have something rather than nothing. But then SSY is also limited to the girl child.
There are also some children-specific mutual funds and insurance schemes. What do you have to say about them?
Dhirendra: If you are actually falling for children-specific mutual funds for the comfort that it is claiming to be a children-specific fund, then go for Sukanya Samriddhi Yojana - at least it will be safe. You should absolutely have life insurance, but that should be a term plan. Don't go with hybrid products which have both investment and insurance - they are too costly.
I think any investment can be for your children's education if you earmark it for that purpose. You just have to be disciplined enough. Any investment can be evaluated on the basis of the return, risk and cost. So you have to see whether you want to take that risk and bear the applicable cost for the return that it is likely to generate. You also need flexibility and to be able to actually use that amount at the time when the goal is due. If you are parked in equity funds, you have the complete flexibility to move your money any time to fixed income. You can do that as you move closer to the goal.
I have heard you say many times that one should avoid taking a loan unless it is for a home. What's your view on education loans? Would you recommend taking one?
Dhirendra: One is that if you do not have money, you will have to borrow. There is no choice. The principle for deciding whether or not to take a loan is that it should not be for consumption. At the outset borrowing money for education might look like consumption. But it has another angle. You are borrowing that money for the investment in your child's life. Education is an investment in the future.
When you are buying a home, you are buying an asset which will get you shelter and which will save you the rent. Likewise, if you actually invest in a child's education, the child will be economically more productive and will yield return for his or her lifetime. So in that sense, it is also an investment framework.
Also, if someone has enough money, I would still encourage people to let the child borrow if he or she is going for a high quality education. Let them borrow a small part of the cost. It will help them become financially disciplined. They will get to know the worth of money. That's a financial education that a parent can give.
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