Parents are concerned about their children and hence wish to know the best education plan. You might have many questions in your mind, like
i) The money that you will need for their education or marriage? or
ii) Will your current investments in LIC or Sukanya Samriddhi Yojana be enough?
iii) Is there anything more you need?
To clear your doubts and guide you in this journey, I hereby present this article. Let's begin!
In This Article
- Which is the Best Child Education Plan in India?
- Step-wise Case Analysis For Best Child Education Plan
- #1: Know the present cost of the course(your kid may choose)
- #2: Find out the Time(in years till the first installment)
- #3: Find out the interest rate and inflation rate for your investment
- #4: Find out the future cost and invest accordingly (monthly/quarterly/half-yearly/yearly)
- Handy Education Calculator
- Alternate Options For Best Child Education Plan
Which is the Best Child Education Plan in India?
To thus simplify this issue, I would share with you my client Mr. Amitabh's (33) case.
He is a Retail Sales Representative with a salary of Rs 40,000 per month. Moreover, he has a small family with his housewife, his son Aayush(6 yr), and daughter Advika(2.5 yr).
Amitabh wants to buy the best child education plan for his kids' future.
Also, before approaching me, he had explored all options and each of them appealed to him.
Therefore, he finally decided to consult an established Financial Advisor.
Step-wise Case Analysis For Best Child Education Plan
Step #1: Know the present cost of the course(your kid may choose)
I do know that you will be saying, "How can I tell what he will choose in the future or what course will he/she select?".
Indeed, it is fair enough. So let's take a few sound assumptions.
Consider the current costs of medical, engineering, graduation, and other popular courses in India.
Moreover, simple graduation will cost around Rs 2 to 4 lakh per annum, while the medical course will be around Rs 25 lakh.
Also, a PG degree in engineering will be around Rs 10 to 15 lakh, whereas an MBA will cost Rs 4 to 25 lakhs, depending on the college.
If you pick foreign education, it would cost a little higher than the above figure. However, if you feel this is a bit expensive, you can go for another option. You may thus plan for a small amount now, and avail of an education loan. Its interest thus ranges from 12% to 14%.
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Step #2: Find out the Time(in years till the first installment)
Secondly, you will have to find out the time in years, you have left till you pay the first installment.
In the case of Aayush, it is 12 years, while in the case of Advika it is 15 years.
Step #3: Find out the interest rate and inflation rate for your investment
Let's consider some assumptions in the below table,
Here we have assumed that Amitabh will begin his investment in an equity mutual fund.
We have also assumed the education inflation rate to be around 10%. It is different from the one published by the government.
*You may be curious to know why such a difference? It is because the education inflation rate is not a basic figure. It also takes into account the lifestyle cost associated with it like tuition fees, accommodation fees, travel expenses, etc. Thus it is the lifestyle cost of inflation.
|Name||Time Left||Interest rate||Inflation rate|
Step #4: Find out the future cost and invest accordingly (monthly/quarterly/half-yearly/yearly)
As per the below table, Amitabh has to invest Rs 26,000 per month for 12 years and then make a payment of Rs 12,000. Moreover, this amount is extremely high in comparison to his salary. But he has no other option but to invest this figure. Though, in the salary of Rs 40,000, Amitabh will not be able to manage the SIP as he has to meet other expenses also.
|Name||Time Left||Interest Rate||Inflation Rate||Future Amount(in Rs)||Monthly Instalment|
|Aayush||12 yr||12%||10%||47 Lakh||14,754|
|Advika||15 yr||12%||10%||62 Lakh||12,000|
Handy Education Calculator
Alternate Options For Best Child Education Plan
After having brainstormed with our client, we came up with the following options,
1. Increasing SIP gradually
Amitabh can thus invest Rs 5000 for his son, and Rs 3000 for his daughter.
You might be tempted to ask whether if it will be enough for him to achieve the goal.
He can increase his investment by Rs 1000 on a year-on-year basis.
So, he will then have to increase his total investment of Rs 8000 by Rs 2000 each year.
Also, he can also choose to invest a lump sum amount as and when he gets some bonuses.
Moreover, he can avail of an education loan in the future if the need be.
2. Life Insurance
Now the question is if it is really worth it for education purposes?
As you know, the education cost inflation is getting bigger each year, with 10%.
The life insurance policy gives a return of 5% to 6%, which is a bit more than the ULIP.
In my opinion, he will not be able to add up the money for his purpose from the Life insurance policy.
Either he will need more money or will be badly short of funds.
Thus, it is best to be avoided for education purposes. However, he should consider buying term insurance with an appropriate amount.
3. Sukanya Samriddhi Yojana/NSC/PPF
Moreover, he can choose to plan for his children's education from Sukanya Samriddhi Yojana or NSC or PPF.
The 3 mentioned products are quite popular and preferred by risk-averse investors. Also, the rate of interest is around 8% in these products and has a lock-in period.
However, he can only invest up to Rs 1.5 lakh per year in Sukanya Samriddhi and PPF accounts.
On the other hand, he can invest any amount in the NSC, but the tax deduction is only up to Rs 1.5 lakh.
4. Mutual Funds
He can also consider mutual fund investments for his children's education.
For this, he can begin a SIP or a lump sum investment in a mutual fund or both.
This choice totally depends on the nature of his cash flows.
In case he chooses to invest through a lump sum, go for STP or systematic transfer plans. Here, you put lump sum money in a liquid fund and transfer some of it on a weekly, monthly, or any other arrangement basis in a targeted fund.
Moreover, MF has plenty of benefits like lower cost, professional management, good liquidity, and inflation-adjusted returns, etc.
He can thus go for a higher equity allocation if the duration is longer, or debt mutual funds.
Any of the above-discussed options can work as the best child education plan for you. It ultimately depends on your retirement, your risk appetite, and your choice.
However, as is thus clear, Mutual Funds offer the highest inflation-beating returns and is the most sought after for such purposes. Happy investing!
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