Given that education plays an important role in moulding a child’s future, it is the responsibility of youas a parent to provide your ward with the best level of education. However, owing to the steady rise of education expenses, it has become very difficult for many to financially accumulate adequate corpus to meet their child’s education needs. Discussed here is a step-by-step measure you must follow to calculate child’s education cost and accordingly plan a smart financial strategy.
- Compute the target corpus required
While it is not simple for you as parents to predict your ward’s career path, you can still assume three to four options and find out their prevailing expenses. Make sure to inflate the most expensive option by assuming at least an inflation rate of 12 per cent for the years left for your child to attain this goal. You can use an education planning calculator to derive the inflated corpus that you must accumulate by the investment timeframe. Once you are aware of the value, you must use an SIP calculator, which you may even find under the option of child education planning calculator to compute the monthly contribution you must make to build the target education corpus.
- Determine a prudent asset allocation strategy
Asset allocation is the process of disseminating your investments throughout distinct asset classes like equity, gold, debt, etc., according to your risk tolerance level, investment timeframe, etc. For example, as equity mutual funds are extremely volatile over the short term, if your investment horizon to accumulate your child’s education corpus is less than five years, then you must consider investing in debt mutual funds to ensure a specific degree of investment growth and avail high capital protection features. However, if your investment horizon to attain your child’s education corpus is five years and above, then you must invest in an equity mutual fund. This is because equity mutual fund has the potential to outperform inflation and fixed-income investments over the long term by a wide margin.
- Start investing early
By investing early, you can get the benefit of the power of compounding. Owing to the compounding effect, the profits yielded on your investible fund begin yielding returns on their own, which ultimately grows into a bigger amount over the long-time frame. For example, if you are looking to form an education corpus of Rs 27 lakh over the time frame of 15 years, then you would need to monthly invest Rs 5,000 at an assumed return rate of 13 per cent. A similar corpus generation would require you to invest monthly in a mutual fund through SIP mode an amount of Rs 33,000 for a time frame of five years. Thus, starting early allows you to form a higher corpus with smaller monthly investments.
Proper financial planning clubbed with disciplined SIP mutual fund investments can act as a rescue to generate a sufficient corpus for your child’s education. Remember, for proper planning you must take the help of an education planning calculator as this would allow you to compute the corpus requirement after factoring in inflation as well as the monthly investible that you must invest to arrive at the required corpus. Also, you must ensure to start with your child’s higher education corpus generation plan as early as possible to get the highest possible time to grow your funds owing to the compounding effect.