We are always running after
something. As children, we run after grades, then college admission, then a
suitable job, then after a suitable mate, then children and then their
education… phew. Education of children is a pretty long-term affair, which
these days require huge commitments, in terms of time and money.
Now, lot of us don’t have time as we
are immersed in our careers, trying to make money. But, since we don’t have
time and competition is intense these days, we put our children in tuitions.
That takes a lot of money again! We all know time is money and it’s full
meaning is evident more than ever, when we pay the tuition fees!
Children’s education has always been
a cherished goal for most. We would be willing to go hungry than see children’s
education suffer. Since we attach so much importance to it, it may be deduced
that we would spend time and effort to invest for it, appropriately.
Alas, that is not true in most
cases. Though they intend to do their best, they put their money away in nice
sounding schemes. Insurance companies have come up with policies specifically
for catering to this goal. People do fall for the emotional tugs & the
happy situations that these policies tend to portray. They also tend to think
that if they have taken a child insurance, their job is kind of over. Insurance
policies for children may have a role for those who want their insurance and
investments bundled. For this convenience, it comes at a price.
For all others, there are several
instruments available to build a portfolio with which to achieve the child’s
education goals. There are lots of advantages to investing in a good bouquet of
instruments. They are –
1.
Choosing the
instrument/tenure & type, according to when the payments are due.
2.
Option to choose from
among the various instruments
3.
Diversification among
various asset classes
4.
Lower cost to you, as an
investor
5.
Ability to change the
mix as we go
Estimating the amount required for
education is a tricky job in itself. One needs to extrapolate it with the
benefit of some hindsight and trends that are apparent. The first thing one
needs to do is to take a term insurance for an appropriate amount, to cover the
child education ( and other ) goals. This will address the uncertainty risk.
Today, term insurances are available for a song and securing a good cover is
not difficult. Also, one needs to take an appropriate medical insurance. In a
medical emergency, a person without a medical cover could be forced to use
money being accumulated for another goal.
After doing that, determine as to
when one requires the payouts. Based on that and based on the risk-return
possibility of the instruments, one could suggest from the rich profusion of
instruments available. PPF can be chosen if the child is very young and the
money is required for graduation/ post-graduation. Since this is a 15 year
tenure instrument, it offers decent possibility of accumulating a good corpus,
overtime. Also, this brings in a certain solidity to the portfolio as it is a
government backed scheme, which offers tax-free returns.
For shorter tenures, there are bank
and company FDs. Currently, their returns are between 9-10.5%, which make them
attractive. But the returns from these are taxable, which diminishes their
attractiveness, to an extent. But since these are for shorter tenures and the
returns are certain, they bring in predictability of cashflows.
Debt funds are good to have in one’s
portfolio as they are tax efficient. Their returns may not be much different
from FDs; but their post-tax returns are much better considering they are
subject to capital gains tax and not normal taxation. If the tenure is over a
year, indexation applies. Long-term capital gains are at 10% without indexation
or 20% with indexation. Fixed Maturity Plans ( FMPs) offer the comfort of
better tax treatment, just like debt funds. It further has the advantage of
having a portfolio which is held to maturity and hence no volatility in
returns.
Equity & Mutual funds are other
investment options which have the potential to offer good returns over time,
but may not be suited if the time period is less. For beating inflation, equity
and equity oriented MF schemes remain the best bets. This could be contested
now as the past 4-5 year returns are poor. While that is true, it remains the
best chance to beat inflation over time – history shows us that. There have
been other periods when the stock markets have not performed… yet, over time (
over 30 years ), it has been able to deliver 17% pa compounded returns. What is
required in this case is patience – loads of it… and iron conviction that
history will repeat itself.
Gold and property have been other
assets which are fancied today. Property has long cycles. It will work only if
one has a long horizon. It can work in the short-term too, but you just cannot
take that chance as that would put your child’s education on the line. Gold is
doing well in the past 10 years. If you look at how it has performed in the
last 30 years or more, it is a lot less flattering. Investing in gold for
education may not be very suitable.
We see so many options, which can be
chosen judiciously would help us put together a good portfolio, to achieve the
child education goal comfortably. No need to fall for advertising legerdemain.
Just a little bit of diligence will help one to put together a portfolio to
achieve child education goals.
Published in Financial Chronicle on 19/7/2012; Article by Suresh Sadagopan
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