You want the best for your kids, donâ€™t you? But how will you do that? How can you ensure your child gets the best education money can buy? Easy, all you have to do is start building a corpus now. But what if we told you that there’s a simple way to build a corpus for your child’s higher education?
Building a corpus for your child’s higher education is the best way to see that they don’t have to struggle or worry about the money needed when the big day comes.
Here are some simple steps that can help you build a corpus for your child’s higher education:
Know Your Target Amount
The first thing you need to do is fix the amount they would need to accumulate for their child’s higher education. You can find out this by considering the future inflation rate, cost of education, etc. and then plan how much you need to invest every month or year to achieve this corpus.
While it may be difficult for you to foresee your children’s future career choices, you may nevertheless pick two or three attractive options and learn about their current prices. Inflate the most expensive of them by multiplying their current cost by the number of years left in your child’s further education.
You can use the mutual fund SIP calculator to get an estimate of your savings.
This would help you plan and be prepared for all your children’s dreams and aspirations in life.
Start Investing Early
If you want to build a corpus for your child’s education, it is vital to start early.
Education inflation has been 10-12% over the years, double that of household inflation. Just imagine how much more expensive it will be by the time your child passes out of school!
If you want to accumulate Rs. 50 lakh for your child when they turn 18, and assuming that your child is now five years old, your monthly SIP amount would be around Rs.14,000 per month. We are assuming that you have invested in an equity fund that offers an average of 12% per annum.
But, if you start when your child is 15 years and assuming the same rate of return, you have to invest a monthly SIP amount of over Rs. 1 lakh. However, if you have such a brief period left, it wonâ€™t be a wise decision to invest in equity funds, and you might have to save your money in a less volatile fund such as debt funds.
It is clear that you will need a substantial sum of money to fund your child’s higher education. As a result, it is critical to get started early to save money for the future. Recognize that getting a higher education is a non-negotiable aim. It means you won’t be able to postpone it.
As a result, getting started early is preferable because it offers you more time. The task will become more difficult for you with each passing year.
Invest in Equities for Returns That Outperform Inflation
You must begin investing in shares to build the needed corpus. This is because, as an asset class, they can outperform inflation in the long run. Systematic Investment Plans (SIPs) in equity mutual funds are a smart approach to dabble in equities to build a higher education corpus. SIPs allow you to start small and stay invested throughout market cycles, critical for building wealth.
If you aim to build a corpus of Rs. 50 lakhs in 15 years, a monthly SIP of just over Rs. 10,000 in a fund with an annualized return of 12% can help you reach your goal. Since previously stated, the sooner you begin, the better, as you will gain from the power of compounding.
Establish A Strategy for Asset Allocation
Asset allocation is the process of spreading investments among different asset classes, such as equity, debt instruments, and gold, based on risk appetite, time horizon, and other factors. Because equities can be quite volatile in the short term, parents with a moderate risk appetite should only invest in equity funds when their children’s education is over five years away. Equity hybrid funds are suitable for those with a modest risk appetite. If your youngster is three years away from completing their higher education, invest in debt funds.
As The Date Approaches, Gradually Shift to Debt
While aggressive equity investing might help you amass the funds you seek, it’s also critical to prevent your investments and gains from being eroded by market volatility. As time approaches, it is recommended to shift the corpus to debt investment options, such as debt mutual funds or fixed deposits.
When your child has less than three years to start higher education, you can gradually withdraw the assets from equity mutual funds and invest them in debt funds. In mutual funds, you can consider a Systematic Transfer Plan (STP), which involves withdrawing a fixed amount from an equity fund and investing it in a debt scheme run by the same fund house.
Shifting to debt funds and even bank fixed deposits can also help you earn some extra money that adds up in the end. While returns from debt funds may vary, fixed deposit provides fixed returns.
Building a corpus for your child’s future is a long-term investment. Investing in the right asset classes early on can help your child build a healthy corpus to take care of their higher education needs. It is important to allocate your investment mix early so that the corpus keeps growing more than the inflation rate.
Gradually shift towards debt instruments as you are nearing your target corpus amount.