Step-By-Step Approach For Building Your Child’s Higher Education Corpus

With the cost of higher education growing at a frantic pace over the last decade, most in the middle class are finding it difficult to finance higher education for their wards. Even public-funded institutions like IIMs and IITs have gone beyond the reach of the most. 

While one can always avail education loans to finance their children’s higher education, the EMIs will burden their children’s finances for years to come. An economic downturn or a depressed job market in between might leave very little for their savings and investment. The best alternative is to steadily create a separate corpus for your child’s higher education through mutual funds. Let me share with you a step-by-step approach for building your children’s higher education corpus.

Fix your target corpus: This is the first step towards investing for your child’s investment corpus. While it would be difficult for parents to predict the future career path of their children, one can still identify 2–3 current lucrative options and find out their current costs. Inflate the costliest among them by compounding their current cost @ 10% p.a. with the number of years left for your child’s higher education. Once you have the ballpark figure, take the help of online SIP calculators to find out the monthly contribution required to build the target corpus.

Determine your asset allocation strategy: Asset allocation refers to the process of distributing investments across various asset classes, such as equity, debt instruments and gold, according to one’s risk appetite, time horizon, etc. For example, as equities can be very volatile in the short term, those having moderate risk appetite should invest in equity funds only when their children’s education is at least 5 years away. Those having low risk appetite can opt for equity hybrid funds. Similarly, invest in debt funds if your child is 3 years away from his higher education. 

Start investing early: nvesting early will allow you to benefit from the power of compounding.  With the help of compounding, the gains made from your investment would themselves start generating gains, growing into a bigger amount over a period of time. For example, someone wishing to build a higher education corpus of Rs 30 lakh over a period of 20 years would just a need a monthly investment of Rs 3,100 at an assumed annualised return of 12%. The same corpus would require a monthly investment of Rs 13,100 for an investment horizon of 10 years. Thus, starting early would allow you to build a larger corpus with much smaller instalments. Opt for the SIP mode of investment to ensure financial discipline, regular investing and cost averaging during market corrections. If possible, increase your contribution in proportion with your growth in income and top it up during significant market corrections. This will help you achieve your target corpus sooner.

Opt for direct plans of mutual funds: Direct plans have lower expense ratio than their regular counter-parts. This ratio is the proportion of fund’s average daily net assets used for meeting its annual operating expenses, such as distributor’s commission, fund management expenses, advertising commission, etc. As direct plans do not incur distribution cost, their operating expenses are at least 1% lower than their regular counterparts. The lower expenses ratio leads to higher rate of returns as the savings made in distribution expenses remain invested in the mutual fund scheme, which then in itself starts to generate returns. While the difference in returns might seem trivial during the initial years, it will grow into a substantial one over the long term due to the power of compounding.

Factor the corpus in your term policy cover:Term insurance is the most cost-effective way of providing financial security to your dependants in case of your untimely demise. These policies provide large life covers at very low premiums. Including the target corpus of your children’s education corpus in your life cover amount would ensure the regular contribution towards your child’s education corpus even in your absence. If you already have an existing term plan and yet to start a corpus for your child’s higher education, buy an additional term plan covering the target corpus of your child’s education corpus. 

Review your investments periodically: Periodical review of your funds’ performance is as important as regular investing. Even star mutual fund performers with glorious past can become hopeless laggards for a long time. Compare the returns generated by your funds’ over the last 8–12 quarters with those of peer funds and benchmark indices. Redeem them for better performing funds if they consistently under-perform their peer funds and benchmark indices for more than 3–4 quarters.