As we celebrate Children’s Day today, let’s learn how to cope with escalating education cost.
Dipankar Jakharia
I am a father of two. The elder one is a college-going adult now. The younger one is in her early teens. When the younger one was born, after a month or so, I got several phone calls from life-insurance agents. And all of them offered me children’s policies, especially to secure their education. Perplexed, it took me no time to find out from where they got my number. I am sure smart agents have connections in all the private hospitals where they extract information about new parents. The reason I am telling you this because I don’t want my readers to fall into this trap. Committing to a product without evaluating, where the future of your children is involved, is a big decision to take. First, let us learn what the current situation is.
Last year, in a survey, it was found that parents spend Rs. 12,000 to Rs. 18,000 in a month on children’s education in tire one and two cities. In the same survey it was found that education fee inflation stands at 11 to 12 per cent, which means that a school fee of Rs. 12,000 a month will become 1.15 lakhs after 20 years. But you must be thinking that 20 years from now, your income will also grow, which is true. But in the same survey it was found that the average per capita income is not being able to keep up with the escalating average cost of education. And if you are eying a foreign university degree for your son or daughter, the inflation stands at 16 per cent. A foreign degree of 50 lakhs will cross one crore after five years. The writing on the wall is clear. Children’s education has become increasingly costly and it’s growing at a faster pace than the average increase in household income.
Bank FDs will give you a six per cent return. An endowment insurance will give you less than that. A Unit Link Insurance Policy (ULIP) might give you ten to 12 per cent. There are mutual funds for children’s education, which are actually structured products, which might give you little more than that. But none will give you a convincing education fee inflation-beating return. So, what do you do?
The best way to make any meaningful investment for the future of our children is through investments in equity. Normally, parents aim to have a meaningful corpus by the time children turn 18. If they want to pursue a professional degree in medicine or engineering, this is the age. So, you can actually plan a term of 18 years to invest. I am not suggesting that you opt for any children’s education products from the mutual funds. This is because you will have far less flexibility in those structured products.
Now to get your numbers, do a reverse calculation. Ask how much you will spend in today’s value on your children’s education. Say, you are hoping that your child goes for a foreign degree and it’s cost in today’s time is 50 lakhs. Eighteen years from now, that same degree will cost you 2.77 crore with ten per cent inflation. And if your equity investment generates a 16 per cent return, you need to start an SIP of around Rs. 14,400 a month. Please note that this calculation has been done with an expectation that you will increase your SIP investment with a top-up of ten per cent every year. This is only an example. You will find many such calculators on the internet. Use them.
A good mixture of equity mutual funds and a pure term insurance is the most ideal way to secure the future of our children and the only way to beat the inflation at which our education cost is heading nowadays.
The writer is a Guwahati based finance professional and commentator. He tweets as d_jakharia
