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A child education plan is a combination of investment and insurance that helps in the financial planning of your kid's future financial needs and requirements at the right age. You can secure your child's future with a child education plan encompassing the insurance needs as well. Under a child education plan, life cover is provided as a lump sum payment on death. Moreover, such plans also offer coverage to your child with flexible pay-outs at significant milestones of your child’s life.
The cost of education in India is increasing at a fast pace. From primary, secondary to higher education, parents are finding it extremely difficult to meet the rising fee structure and other costs associated with education.
According to research conducted by National Sample Survey Office, between 2008 and 2014, the average annual expenditure for private education (from primary education to post-graduation) have gone up about 175% while during the same period, the annual cost of technical and professional education increased by 96%. These expenses include course fees, books, coaching, transportation, and other related expenses. Moreover, the cost of providing education to your child in private schools in the year 2014 was about 11 times more than that in government schools. In contrast, the cost of delivering higher education from a private institution is three times more than that of government-owned institutions.
Creating a corpus towards a child's education is one of the primary financial goals for Indian parents and often takes importance over every other goal. Knowing that an early start makes a huge difference, many parents today are prepared to invest in a child education plan right from the child's toddler stage.
However, an early start will be of little use in case you end up investing in the wrong investment avenues. Here are some of the essential requirements to build a healthy corpus through a child plan.
You need to plan in advance by setting up a target amount for a child's education needs. With the introduction of so many career options, it might be difficult for you to zero-in at the right career option which your child might want to take up in the future. However, to make an informed start, you can narrow down a couple of career options and figure out their current cost.
Consider inflation: Once you have estimated the approximate requirement of funds, find out how much you would require to invest each month towards it. For IITs, for instance, the total cost of a four-year B-Tech course would require approximately 8 to 10 lakhs today, a fourfold rise from about Rs. 2 lakhs in 2012. The course fee at the top management institutions such as IIMs is about Rs.21 to 22 lakhs against Rs. 13 to 15 lakhs in the year 2012. Moreover, the cost of putting your child in private colleges for completing their education is quite higher.
While the current cost of a graduate and post-graduate degree at premier institutions is about Rs. 30 to 40 lakhs, you need to consider inflation while calculating these costs over the next 10 to 20 years to decide on your target corpus.
Many online calculators help you figure out your target corpus to meet the future educational requirements of your child. While using these calculators, make sure to consider 8 to 10% inflation rather than keeping it 0 to get an unrealistic figure.
Don’t avoid equities: Many people investing in child education plan like to stick with safe debt options such as traditional insurance plans or post office schemes to meet the goal as they offer capital safety. However, lower risk of funds is accompanied by comparatively lower returns. A traditional child plan offers 5 to 6% annual returns. Returns from post office schemes such as PPF and NPS and Sukanya Samriddhi Yojana are healthier at 7.9% and 8.4%, respectively. But even these may barely meet the inflation rate in educational costs. This makes investment in a sizeable equity component important to get your child's education goal.
Look beyond child plans: Before investing in a child plan, it is essential to ask yourself a question if this plan will meet the future financial requirements for your child. There are some specific things to avoid. Child endowment and moneyback plans from insurance companies with a return guarantee usually offer low returns to make up for the safety component. They can be dodged as they may fail to keep up with the inflation rate. Many of these plans offer a life cover for your child. What you need is a sufficient term insurance cover for yourself and other breadwinners in your family; therefore, your child's education needs are met even when you are not around.
Moreover, mutual fund schemes that are designated as "child plans" often come with a lock-in period, which prevents you from switching out in the event of the fund fails to keep up with its peers. Plain, aggressive funds or multi-cap equity funds may make a better choice, offering good potential return with higher flexibility. Overall, a combination of NPS/PPF, and SIP in multi-cap equity funds and a sufficient term insurance policy for the breadwinner, are the essential requirements to fund your child’s education.
Remember, even if you pause your monthly investment for a while, do not redeem your goal-based investment portfolio to meet other short-term needs. Funding your child’s education is a dream you cherish the day your kid was born. Therefore, it is recommended not to do anything which stops you from realising yours and your child’s dream.
Recommendation: Why you need a child plan for your childs education