On the eve of Children’s day, we thought of discussing the topic of child education fund. For families providing for child education is basic goal. It’s on virtually every investor’s mind. Here are some of the things we have learned from our experiences.
Deciding on how much funds are needed for child education is not known forehand. We get answers like we don’t know how much; we have not thought for it, we don’t know what path kids will take. But the desire to create separate funds for Child future is very strong.
Prepare than repair
I would say we may not be 100% certain about the funds requirement as the goal is in the future. But it is better to prepare than repair. Our approach has been to provide for what the family finances can do best at this point of time – To start with 25 Lakhs or 50 lakhs etc. The amount could vary depending on choice of university or college in abroad or India.
Like any other goal the family belief system influences how much to allocate for Education. Parental experiences and vision for kids too gives shape for the education goal apart from what child wants to choose.
You can set target education fund amount based on the cost structure of some of the popular courses. One such website to help you to find the cost of different courses is www.getmyuni.com.
Finally having funds allocated for child education gives options and power to grab opportunities.
Buying or keeping Real estate for Child Education
Should we buy a real estate for child education purpose or keep the plot of land for child’s future? This is a common conundrum. Belief in real estate or property is very strong in Indians so eventually they transmit it to fund the education cost.
Our experience says that real estate is the most illiquid asset. Prices of the asset rise on the paper. More often than not, you don’t find a buyer at the given price when you need the funds. There are not proper indices or benchmark to arrive at current price of the asset. Last property sold or bought price becomes the target price to sell or buy. Buying real estate is easy selling is very difficult.
Historical returns (compounded) on real estate don’t cross 7-8% per annum. But most of us count it in absolute numbers- bought for X value and sold for Y.
If at all you have in mind to use proceeds from sale of property for education, make provisions in advance of 1-2 years by selling property 1-2 years earlier than when your child needs it for college fees.
What is the best way to invest?
We come to final point of what is the best way to fund child education. In our experience, Financial assets have time and again have proven to be the better way to earn good returns (double digit), easy liquidity whenever you need it and transfer of funds etc. Diversified equity funds, balanced funds can be selected for regular accumulation of funds.
Depending on the Risk taking ability we suggest allocation to Midcap and small cap funds for very long term goals. You can debt balances in form of PPF or debt fund. Risk cover for parent is suggested in form of Term Insurance.
Allocation to international fund is suggested if you have aspirations to send child abroad for studies. One need to build in caution of Risk management to Book profits or tune equity allocation as one is reaching towards the funding year- say Graduation year or so.