The roots of education are bitter but the fruit is sweet – Aristotle
The biggest satisfaction for parents is to see their kid’s well educated and well settled. That’s mission accomplished and a big relief for parents in their retirement years. Many times I meet parents of successful people and I feel a sense of accomplishment and satisfaction.That is so good. Coming from a middle-class family, we compromised on many luxuries but my father felt happy to be stretched to the limits when the matter was related to educational expenses. A careful planning can alleviate many of the financial worries related to funding kid’s education.
In the first part of planning for kid’s education ( the full article ), we got an idea about how much it costs to study at different institutes, across streams and across different type of institutes (private/ government and India or abroad). There is a marked difference in the cost of education at a government institute and a private college, the latter being quite expensive. No wonder, the competition for admission is brutal for government colleges with only top 1% to 2% making the cut. There are good private colleges as well who provide quality education but since they are not subsidized by the government, they are expensive. Therefore, it makes sense to have a financial plan to fund your kid’s education. We will discuss various options available and then I will talk about what is the best option, in my view.
Future cost has been calculated using 6% education inflation. For overseas courses also, an education inflation of 6% (4% rupee depreciation and 2% fee inflation) in INR has been used.
Option 1- Fixed deposits and recurring fixed deposits
Fixed deposits provide certainty of returns but this comes at the cost of tax inefficiency and lower return. If the time available for the goal is less than 3 years and fixed deposit is opened in kid’s name (who is minor but will be adult when money is withdrawn), then one can consider fixed deposits. However, I always find debt mutual funds a better option than fixed deposits in any scenario (see here). So, for parents with very short time horizon, it will be better to go for debt mutual funds.
Option 2 – Child plan of insurance companies
The children plan from insurance companies is a combination of insurance and investment. The investment component of the plan pays at different threshold of kid’s educational journey while the insurance component gives protection in the unfortunate event of death of the parent. Part of the premium that is paid is used towards payment of the insurance premium. More details on the features of the plan can be found here.
In my view, combining insurance and investment is rarely a good idea. If a person already has adequate insurance, then the child plan loses some much of its utility.
Option 3 – Children plan of mutual funds
Some mutual funds have also launched mutual funds with “children” attached in the nomenclature of the fund. Mot features of these plans are like other mutual funds. These plans invest as per the specified mandate. The children plan by mutual funds differ from normal mutual funds in two aspect:
- The mutual funds have extra exit loads to prevent early redemption. For example, most normal equity mutual funds don’t have any exit load after 1 year but children mutual funds normally have some exit load for extended periods.
- The nomenclature of the funds with “children” in it is supposed to make parents think twice before early redemption
Essentially, it is like a normal mutual fund but with more exit load in it. As most of us don’t buy and sell mutual funds whimsically and surely don’t need an emotional reminder for not selling a mutual fund holding, we can go for normal mutual funds instead.
Option 4 – Combination of normal equity and debt mutual funds
This will be the most tax efficient, flexible, transparent and versatile option. Furthermore, depending on the available time to reach your goal, combination of debt and equity mutual funds can be used to get the right asset allocation. Furthermore, here what you see is what you get.
To summarise:
So, for people planning for kid’s education:
- For people with short investment horizon, debt mutual funds are more tax efficient and liquid option than fixed deposits.
- Children plan by insurance companies try to combine investment and insurance in one product. As a result, they introduce more complexity and opacity.
- Children plan of mutual funds are like mutual funds but with more exit load embedded. It is better to opt for normal mutual funds.
- Combination of debt and equity mutual funds provides the flexibility to choose right asset allocation and high tax efficiency. I will any day prefer this option over other options above.
Disclaimer: The above content is just for information and should not be construed as an offer to buy or sell or recommendation. Contact your financial advisor for guidance on any investment related query.
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