Last Updated on August 13, 2021 at 8:23 am
In this article, let us discuss a question received from a reader: My financial goal is my child’s higher education. I’ve 6 yrs for that. What should be my investment strategy?
Let us assume that the reader has practically nothing saved up for this goal and that she has little experience investing in market-related products (mutual funds). On top of this with just six years left, our options are limited but still doable as long as the family has enough investible surplus (aka money left after expenses and EMIs to invest).
When we have more than ten years left before college, the entire fee to be paid can be thought of as a one-time expense (at least initially). In the present case, let us look at this year by year.
We will assume the goal here is a four-year UG degree. The first step is to ask around and find out the current 1st year or 1st-semester fee, “admission fees” and recurring semester fees. Suppose the semester fee is Rs. one lakh and the initial joining fee is Rs. four lakh.
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This is only an example. You will have to redo the calculation with numbers relevant to you. The investment you need to make may be considerably higher if the fee today is higher than what is assumed.
- Six year from now corpus needed for 1st year fee: (2+ 4) x (1+ 12%) x (1+ 12%) x (1+ 12%) x (1+ 12%) x (1+ 12%) x (1+ 12%) = (6) x (1+ 12%)^6 = Rs. 12 lakh. Here 12% is the expected inflation in fee.
- Seven years from now: 2 x (1+ 12%)^7 = Rs. 4.4 lakh
- Eight years from now: 2 x (1+12%)^8 = Rs. 5 lakh
- Nine years from now: 2 x (1+12%)^9 = Rs. Rs. 5.5 Lakh
- Total: 26-27 lakhs.
We can divide this into two goals. Rs. 15 lakhs as the target corpus for a goal 6 years away and the remaining Rs. 11-12 lakhs as the target corpus for a goal 8 years away.
First Goal: I would recommend investing the corpus necessary for the first two year fees in a combination of reasonably low-risk instruments:
- “Safe” Bank FDs or RDs
- Money market mutual funds
If you like to take on a little more risk, you can include
- 20% of a conservative hybrid fund like Parag Parikh Conservative Hybrid Fund This will be quite volatile (especially for newbies to mutual funds), but at least the bonds will be of good quality.
- More adventurous investors can consider 20% of a Nifty 50 Index fund
- 20% is what I would recommend a newbie wanting to take on some risk. Those with more experience can increase exposure.
- If these funds offer a good return in any year, some profits can be shifted to the money market fund or an FD.
- From the middle of the 5th year, you start reducing the 20% to zero.
Assuming a return of 5%, the investment required to reach a corpus of about Rs. 15 lakhs after 6 years would be Rs. 14,000 to Rs.15,000 per month increasing each year at the rate of 10%.
Second Goal: Here I would recommend 60% in FDs/Rds/ Money market funds and the rest in a Nifty index fund or Parag Parikh conservative hybrid fund. The same funds can be used for both goals.
Assuming a return of 6%, the investment required to reach a corpus of about Rs. 11 lakhs after 8 years would be Rs. 6000 to Rs.7,000 per month increasing each year at the rate of 10%. This investment has to be continued for eight years, that is two years after the child has entered college.
Thus the total investment to be done is Rs. 20,000 to Rs. 22,000 increasing each year at the rate of 10%. If this amount can be spared, there is a reasonable chance of achieving paying college fees without an education loan. Many may feel that the returns assumed are too small. It is better to be safe than sorry.
Note: we have assumed costs for a four-year engineering degree from hearsay. The costs will vary from city to city and upon the degree. You will need to do research by talking to parents who have just paid for 1st-year college. Any online goal tracker can be used to compute the investment required for a different target corpus.
In this case, we have used this staggered approach – treating the last two-year college fees as a separate goal – because there were only six years left to the first year. If there are 10+ years for your child to enter college, you can initially treat it as a single goal and then after the corpus builds a little, consider the staggered approach.