What you need to keep in mind while saving for children’s education

Financial Planning | admin | September 21, 2011 at 5:23 am

Saving for children's education is an important goal for the Indian parents. However, a lot of investors do so indirectly, without focusing on it. That is not the best way to save for a goal. It is important that instead of one monolithic investment for all financial goals, parents segregate it into different baskets.

We even advise our clients to have separate folios for different goals. They might be investing in the same mutual fund scheme for their retirement corpus, but it's better to have a separate folio for the education funds. Start by earmarking an amount that needs to be invested every month for the child's education.

This will not only give you a better idea of how much you have accumulated, but also prevent you from dipping into the corpus for discretionary spending. When you are mentally marking the funds and keeping them aside, you will not be tempted to touch the money.

DISCIPLINED INVESTING

If you do not demarcate, you will not be able to attain the financial discipline needed to save for this crucial long-term goal. We have seen clients, who start building a corpus for their children's education, only to withdraw that amount after three years to go on a holiday.

For such people, we have recommended child Ulips. They complain that we are trying to sell them expensive products. This is not the case. We are simply trying to sell them discipline. This is important if a parent wants his savings to gain from the power of compounding. Breaking them midway will disrupt the entire planning.

HOW MUCH RISK?

Parents must assess the amount of risk they need to take to achieve their goal. If a parent needs to save, say, Rs 30 lakh in 15 years, and he can reach this figure through debt-based investments that give 6-7% returns, there is no need to take the risk of investing in equity-based plans. If the person is earning well and can afford to save a larger amount, even a low-yield traditional, guaranteed income plan will serve his purpose. A lot of high net worth individuals (HNIs) are buying these traditional insurance plans.

SIZING UP A ULIP

However, if the parent needs a return of 10-12% to reach the Rs 30 lakh mark, and is willing to take risk, then he can choose a Ulip. While investing in a Ulip, check the projected internal rate of return (IRR). The Irda has mandated that the IRR should be mentioned in the benefit illustration. In the 10% illustration for a 15-year plan, it should be around 8.25%.

In a 20-year plan, it should be at least 8.5%. If the IRR is high, say 8.5%, it means the charges are not too much. Make sure that you insist on the inclusion of mortality charges in the IRR calculation. Agents are clever and are likely to show you a table that doesn't factor in the mortality charges in the IRR.

Source: Economic Times