In line with Children’s Day theme, we are sharing two experiences that talk about the challenges of building an Education Fund. Often, we meet prospective clients who wish to discuss ways to create an Education Fund through judicious investment. We hope it helps you work out which is the best way to build an Education Fund.
Briefly speaking, here is the first scenario – the client’s child wanted to learn art and design abroad. The client wanted to find a prudent way finance this. The child had qualified for the course and secured selection at an institute in the United Kingdom. The parents wanted the child to have this experience. How to finance it, was the question they were grappling with. At the time of admission, the parents felt the liquidity crunch so decision to avail loan was taken.
The quantum of funds they expected the child will need was far less than the actual requirement. This happens often. That’s why, it’s important to revisit the Education Fund Goal annually and take stock of what has been created and how much more might be needed.
Yes, education loans are available from all nationalized bank. But these are secured loans. You need to pledge assets to get the funds. This was not something this client could do – there was no asset that could be pledged as security. So the client’s elder brother chipped in and pledged his flat to move the paperwork and get the loan from the nationalized bank. This isn’t the most efficient way to go about financing an Education Fund. There are better ways to do it. And this is where we can help.
Time and again, we reiterate that funding a child education with real estate is not a sound idea. Let’s see how.
We met a family. They had booked a flat and were paying a hefty EMI for the loan at 10.5% per annum. They assumed their investment in real estate will deliver more than 10-11% returns at time of selling in future. It was a fanciful assumption based on blind faith and unsound fundamentals. Here’s why.
The basic premise that fuels this kind of ‘real estate investment for Education Fund’ creation thinking is that the cost of loan is much lower than the expected appreciation of the investment the loan was taken for.
Unfortunately, it almost never is so when you invest in real estate to finance an Education Fund. This is because the interest cost incurred on account of paying back the loan is greater than any possible appreciation in property. Most people don’t understand and overlook don’t pay heed to this and pay for it dearly. We have the data to prove it. Put simply, buying property on loan to finance an Education Fund is a strict No-No.
What, then, is the most sensible way to go about financing an Education Fund?
- Assess the amount you need to finance education-related goals. That said, goals are not certainties. , Set reasonable enough goals – taking into consideration, family income, expectation etc.
- Decide on a sound investment plan, considering time, available assets and your appetite.
- Review the goal at vital checkpoints. Keep tabs on any reassessment and see if you need to make any changes in your investment strategy.
- Our goals are linked to emotions, so choose investments wisely.
- Finally, your Education Fund should not be financed by giving up investing in a retirement fund.
Do we help our clients to create education fund ? Yes we do. We are here to do the same for you. Welcome.