Not so long ago, this question probably never occurred to parents. Those were the good old days, when education/marriage although expensive, were not unaffordable and your investments in Public Provident Fund, National Savings Certificate and fixed deposits earned you a good enough rate of return. So even with minimal planning, parents could manage to make ends meet as far as planning for their children's future needs were concerned.
To be sure, the 'good old days' are well behind us. Today, your child's future depends as much on you as it does on them. To better appreciate what has brought about this rather dramatic turn in events, let us first understand how things were in the good old days and what has changed since.
Parents will remember with fondness the days when PPF and NSC gave then a return of 12 per cent. For most parents, these avenues proved good enough for setting aside money for the future to meet expenses related to child's education or marriage or even seed capital for a business opportunity. For instance, if a parent invested even Rs 50,000 in NSC at 12 per cent, over 10 years, this sum would have grown to Rs 155,292, which was just about enough to cover the course fees for an MBA, for instance. Moreover, with tax benefits, the effective rate of return was a lot higher than 12 per cent.
At present, the rate on PPF/NSC is 8 per cent; in effect this rate has dropped by a third in a matter of three years. Rs 50,000 invested in an NSC at 8 per cent over 10 years will now return Rs 107,946, which is nowhere near what an MBA course costs. In what is a double blow for parents, tax benefits associated with NSC have been diluted. So on a post-tax basis, investments in NSC are no longer that attractive.
Inflation is another factor that has worked against parents in their quest for a better quality of life for their children. Put simply, inflation means paying more for the same good/service. With respect to child's education it means paying a higher fee for the same degree (engineering, MBA, medicine). Inflation works stealthily in the background, we do not see it, in fact we may even forget it exists, but the damage it can inflict to the grand plans you have for your children is telling.
An example will help in understanding how inflation works to your detriment. You want your 5-yr child to pursue a business management course (MBA) on completing college. The MBA course is worth Rs 500,000 today and your child is a good 15 years away from pursuing his MBA course. Assuming that the MBA course fees are hiked by 10% per annum, the number you are looking at 15 years hence is Rs 2,088,624! And remember these are just the college fees. If your child will be pursuing the course in another city, you will also have to provide for lodging expenses, which could be as high as 20 per cent of total college fees.
While we have shown education by way of example, it's the same story with everything you plan to build for your child, be it marriage, buying property, saving for a potential business opportunity. Any way you look at it, inflation can make a dent in your plans and prudence demands that you make elaborate plans to meet it head on.
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Thankfully, the solution is at hand. And commencement of planning at an early stage is an important step in this process. In our illustrations below, we have outlined how parents, if they start planning early enough, can save comfortably to meet the spiraling costs of their child's education. Given that the career choices for most children revolve around three courses - engineering, medicine and business management, we have assumed three distinct scenarios.
Also, we have assumed that parents will opt for investment avenues like equity funds that offer tax-free returns over longer time frames (more than 1 year) or life insurance (which offers tax-free returns on maturity) to build a corpus for the child's education. Furthermore, expenses charged on the aforementioned investment avenues i.e. entry loads/expenses as a percentage of premium, have been factored in at 3% (although the number is lower for mutual fund investments), over the investment tenure.
Solution for Child's Education (MBBS)
| Aggressive | Moderate | ||
| Cost of MBBS today | Rs | 945,000 | 945,000 |
| Time to pursue the course | yrs | 15 | 15 |
| Expected inflation in fees | % | 10.0 | 10.0 |
| Expected cost of the course | Rs | 3,947,500 | 3,947,500 |
| Solution | |||
| Aggressive | Moderate | ||
| Monies to be accumulated | Rs | 3,947,500 | 3,947,500 |
| Assumed Return (Pre tax) | % | 10.0 | 6.0 |
| Assumed Return (Post tax) | % | 10.0 | 6.0 |
| Tenure | yrs | 15 | 15 |
| Annual savings before expenses | Rs | 128,086 | 174,840 |
| Expenses | % | 3 | 3 |
| Annual savings required | Rs | 124,243 | 169,595 |
You want your 3-yr child to pursue an MBBS course after he completes his schooling. An MBBS course from a reputed institute, today, costs approximately Rs 945,000 (this includes the course fees as well as the lodging expenditure your child will incur if he opts for the course in another city) and your child is 15 years away from pursuing his MBBS course. Assuming that the MBBS course fees are hiked by 10 per cent per annum, the number you are looking at 15 years hence is Rs 3,947,500. The figure appears overwhelming, but if you start planning for it now it can be within reach. As per our calculation, if the rate of return is assumed to be 6%, then you need to invest upto Rs 169,595 per annum (p.a.) to reach this figure. Likewise, on assuming a 10% return, you have to invest upto Rs 124,243 p.a. to accumulate the desired amount.
Solution for Child's Education (Engineering)
| Aggressive | Moderate | ||
| Cost of Engineering today | Rs | 700,000 | 700,000 |
| Time to pursue the course | yrs | 15 | 15 |
| Expected inflation in fees | % | 10.0 | 10.0 |
| Expected cost of the course | Rs | 2,924,074 | 2,924,074 |
| Solution | |||
| Aggressive | Moderate | ||
| Monies to be accumulated | Rs | 2,924,074 | 2,924,074 |
| Assumed Return (Pre tax) | % | 10.0 | 6.0 |
| Assumed Return (Post tax) | % | 10.0 | 6.0 |
| Tenure | yrs | 15 | 15 |
| Annual savings before expenses | Rs | 94,878 | 129,511 |
| Expenses | % | 3 | 3 |
| Annual savings required | Rs | 92,032 | 125,626 |
Likewise, for pursuing an engineering course (including lodging expenses), which costs approximately Rs 700,000 today, you will have to shell out Rs 2,924,074 after 15 years. At 6 per cent rate of return you have to invest upto Rs 125,626 p.a., whereas this figure will be Rs 92,032 p.a. at 10 per cent rate of return.
Solution for Child's Education (MBA)
| Aggressive | Moderate | ||
| Cost of MBA today | Rs | 520,000 | 520,000 |
| Time to pursue the course | yrs | 15 | 15 |
| Expected inflation in fees | % | 10.0 | 10.0 |
| Expected cost of the course | Rs | 2,172,169 | 2,172,169 |
| Solution | |||
| Aggressive | Moderate | ||
| Monies to be accumulated | Rs | 2,172,169 | 2,172,169 |
| Assumed Return (Pre tax) | % | 10.0 | 6.0 |
| Assumed Return (Post tax) | % | 10.0 | 6.0 |
| Tenure | yrs | 18 | 18 |
| Annual savings before expenses | Rs | 65,365 | 96,441 |
| Expenses | % | 3 | 3 |
| Annual savings required | Rs | 63,404 | 93,548 |
An MBA course, which at present costs around Rs 520,000 (including lodging expenses), will cost Rs 2,172,169 after 15 years. To accumulate this amount, you have to invest around Rs 93,548 at 6 per cent return p.a. or Rs 63,404 at 10 per cent return p.a.
There are some points parents must note that will help them plan for their child better.
1. In our illustration, we have assumed that parents commence their planning from scratch i.e. they haven't saved any money at all. However, if parents have already set aside some money to begin with, it can serve as a major boost to the planning process.
2. Parents, who are willing to take on higher risk, need to save less for their child's education. However, parents must note that taking on higher risk is not a surefire recipe to financial nirvana. There could a lot of ups and downs along the way.
3. As tax laws stand today, proceeds from long-term investments in equity funds and life insurance are tax-free. So the money you are accumulating for your child's education by using these avenues will not be taxable. However, if tax laws were to change along the way (after all 15 years is a lot of time), the tax implication will have to be factored in your calculations.
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