Suryansh was just five years old when he first expressed his interest in cooking. As parents are made of, Srinivas and Sravanti Murthy thought almost immediately to stop short of nothing but send Suryansh to the best hospitality school in the world. While watching him muse over the vegetables and sauces, the Murthys calculated that they required around Rs 15 lakh for an undergraduate programme, a reckoning amount for any parent. But the Murthys were not unnerved as they had already bought a child education plan a couple of years earlier. Happy with this thought, they blissfully went back to watching their son make a mess of the kitchen. But are Srinivas and Sravanti on the right path to their child’s education? Will Rs 15 lakh be enough for Suryansh after 15 years? Let’s weigh the options.
Parents need to set their priorities before planning their child’s future. Foremost of these is the amount or corpus they believe is required to fund their child’s higher education. In the Murthys case, they believed that Rs 15 lakh would be enough, but they failed to factor in the rate of education inflation, which is currently at 12% to 13%, much higher than the rate of retail inflation in the country. At that rate, the Murthys will require Rs 28 lakh to Rs 30 lakh after a period of 15 years.
Another thing that parents should keep in mind to secure your child's future is not to mix their insurance with investment. A child plan is generally a unit linked insurance product (Ulip) which gives the investor the opportunity to grow their money and also provides insurance cover or security to their child’s future at the untimely death of the parent. Most insurance companies now provide the option of waiving off the premium to be paid during the policy tenure if the insured passes away or falls critically ill. The sum assured is paid to the child who is the beneficiary.
Child plans can also be mutual fund schemes such as HDFC Children’s Gift Fund, UTI Children’s Career Balanced Plan, ICICI Prudential Child Care Plan and Axis Children’s Gift Fund. These schemes are hybrid in nature. They invest about 65% in debt instruments and the rest in equity. However, neither the Securities and Exchange Board of India nor the Insurance Regulatory Development Authority have specifically defined a child plan product. Fund houses use this name to attract investors. But consider this, if the Murthys invest in other instruments, would they have earned better returns than the child plan?
Apart from investing for your child, there are a number of instruments in which a parent can invest to garner the corpus required for the child’s future education. The instrument which you choose depends on the risk-taking appetite of the investor. As such, investors can be divided into three categories:
Conservative – One who expects average returns with lower risks. They can invest in PPF, NSC, Post Office and bank fixed deposits.
Moderate – One who expects a relatively balanced return with limited risk. These people can invest in gift funds, debt funds and balanced mutual funds.
Aggressive – The investor who expects potentially higher returns with high risk. They can invest in equity, mutual funds, stocks and securities.
For a conservative investor who puts in money for his child in the Public Provident Fund (PPF), the return is around 8.7%. The rate is fixed by the government and is unlikely to go down below 7% in the next 15 years.
Similarly, for those investing in mutual funds for a long term (15 years), the returns are a minimum 10% to 11%. Despite it being market linked, the risk over a longer time period is distributed and is unlikely to impact the investor.
Apart from these, parents can also invest in bank fixed deposits and gold. For short term investments like school fees, books and stationery etc, parents can maintain recurring deposits or choose from short term debt funds.
Last year, Suryansh wanted to be ‘Bob the Builder’ and next year he may want to be an ‘Indian Idol’. Kids keep changing their dream, but parents cannot. So choose wisely and maintain your investments so that whatever field your child chooses to conquer, there will be no financial strains to impede his progress.