I. It is never too late to plan your child’s studies (Source - mint)

• Evaluating the average cost of education in India and abroad will help you set a target for investments


• If you are starting late and are unable to save too much, consider taking an education loan if the need arises

When Bengaluru based Pradeep Jois, 36, met his financial planner a couple of months ago, his primary financial goal was to save for his six year old daughter Anvita’s education. Once Anvita was born, my wife and I realized we needed to plan not just for her education but other things too because she is a girl child and the society has certain requirements such as wedding expenses. He wants to save Rs. 20 lakh for Anvita’s undergraduation and another Rs. 20 lakh for postgraduate education. Since the goal is 12 years ahead, they have invested in equity and debt in a 60:40 ratio. They are investing taking into account the future cost of education. If Anvita insists on studying abroad, what we are saving may not be enough. We will then move some funds from the wedding corpus and have simpler ceremonies, said Jois.

While Jois has started investing at a time when his daughter is still young, financial planners say it is never too early or too late to plan for your child’s education. However, the earlier you start the better because if your investment tenure is longer, the power of compounding works wonders. Most planners insist on breaking the goal into two under graduation and post graduation because many students now prefer going for a specialized masters degree which comes at a high cost.

This Children’s Day, we take you through how you can go about planning your child’s education at three different stages: when she is a toddler, a grade schooler and a teenager.

Toddler

Planners we spoke to said most of their clients regret not planning for education when their child was still a toddler. It is never too early. Given that investments are like trees, the earlier you plant them the better.One of the reasons why people are not motivated to start saving early is that they do not have an inkling of what their child would like to do in future. You can overcome this by evaluating the average cost of education in India and abroad. Take an average of what it costs to study abroad and in India and just start saving.

Education cost comparison

Given that a lot of children now want to study abroad, investing has to be in sync with the expectations. For instance, an average MBA in India costs about Rs. 13 lakh - 39 lakh, but the same degree in the US can cost up to Rs. 1.5 crore. You will also have to account for inflation which will balloon up the expenses further. Once you have the target amount after taking inflation into account, go backwards and see how much you need to save every month.

Of course, you have other goals to fund as well, so it is important to keep two things in mind. First, prioritize your goals (retirement and child’s education). Second, get your asset allocation right. If you start investing when the child is a toddler, you will have a good 14-16 years to invest, so putting your money in a well managed diversified equity mutual fund would work well. As you near your goal, you could gradually shift the money into a liquid debt fund.

Finally, understand that not planning in advance could mean disrupting your other goals.

Grade schooler

When your child is 6-12 years old, you have fewer years to invest. If the schooling itself is very expensive, then you will not have the investible surplus for undergraduate and postgraduate education. Hence, it is important to take up a budgeting exercise to understand your current cost of living. Divide this into fixed and variable expenses. You can not do much about the fixed expenses but try and cut down the variable ones, spending too much on school education and not saving enough for higher education is a mistake parents often make.

Also, at this stage you may not be able to direct your entire investible surplus towards education, because you also have to save for other, equally important goals such as your own retirement. Fortunately, you would have about 30 years to reach this goal but that does not mean you should neglect it.

For your child’s education, in particular, start saving in a large and mid cap fund. However, do not stress if you are unable to save a large amount.

At a later stage, you can consider taking an education loan, if the need arises. One solution could be children helping with the repayment of the loan and parents providing a collateral to get it sanctioned in the first place.

Education loans offer tax benefits as well. You could factor in taking an education loan, when the need arises. According to Section 80E of the Income tax Act, the borrower of an education loan can claim a deduction on the interest paid. There is no limit to the amount that can be claimed as deduction under this Section, but its available only on the interest portion. It can be claimed for a period of eight years, or till the time the entire loan is repaid, whichever is earlier.

Get structured in your thinking and plan your SIPs accordingly, and know which SIP is serving which goal. If you feel you would have to compromise on other important goals, then let the child take on the responsibility of his or her postgraduate education (by taking on an education loan).

Teenager

If you have not planned anything by this point, it could leave you in a state of panic. By now your child is already a teenager so it is important to be realistic about the education goal. Having goals such as wanting to save Rs. 1 crore in five years may not work if you cannot set aside a substantial corpus and are hoping your investments to do the hard work for you. If you are starting to plan at this point you will need to start living on a tight budget because the amount to be saved and invested would be quite high. You may also need to reconsider the target amount based on your saving capacity.

In case you feel the goal is too close and the target amount too high, have a discussion with your child and consider alternatives. Encourage your child to register for scholarships. Indian parents emphasize on good education and parents go to any length to provide this even if it is not affordable. This is not a good idea because it could make the child take you for granted.At this stage, when the goal is between four to six years away, short term debt funds would be a good choice for investment because it is not advisable to take too much risk if the goal is very close.

If the child is opting for an education loan, know the costs. Typically a loan is offered at an interest rate ranging from 5-15% with a mandatory guarantor for a bank loan over Rs. 4 lakh and collateral for a loan over Rs. 7 lakh. The tenure is usually seven years. Banks offer loans either to the sponsor where the EMI begins as soon as the loan is disbursed or to the student where there is a stop gap period before the EMIs begin.

Mint take

When it comes to education planning, starting off as early as possible is an important step. Have a fool proof financial plan and map it with your income and savings. Education is critical but giving your child the best education need not necessarily be an expensive affair. Do proper due diligence about the colleges to ensure you are putting your money where your mouth is.

While you may be excited about sending your child to the best institution, do not forget you have other responsibilities to service. Also, never compromise on the contingency corpus just to fund the child’s education because in difficult times, you will need that money. Work with a financial planner if you need further clarity.

II. Should you buy life insurance or open a PPF in your child’s name? (Source: mint)

• Most products do not offer any additional returns or tax benefits if you invest in your children’s names

Children’s higher education and marriage are typically the primary financial goals for most people. There are various products you can consider to invest for the two long term goals. But when doing so, does it make more sense to invest in the name of the child, rather than in your own name?

Most experts are of the view that, except in a few cases, investing in the name of child does not provide any significant advantage to the parents. What you can do is earmark a certain portion of your saving for goals related to children and ensure you do not use the corpus for any other purpose. We ask our clients about their goals and ask them to set priorities. Investing in a child’s name is not a factor when investing.

We tell you about children specific products available in the market and whether they offer any additional advantages.

KID SPECIFIC PRODUCTS

Many instruments allow investments in the name of a child such as mutual fund schemes, insurance policies, Public Provident Fund (PPF) and so on.

Typically, insurance agents pitch schemes and plans which are labelled or marketed as child specific plans. Though the names of some of these schemes, especially insurance plans, indicate they are customized for children, they provide no additional benefits such as additional return, tax deduction or exemptions, factors that are important to consider when investing.

Insurance in the name of the child as the policyholder is an absolute no-no. Conceptually, term insurance is taken to protect the economic value of one’s life and it does not make sense when the child is not earning.

At the same time, if you have a PPF in your name as well as in the name of your child, remember that your overall investing limit for all your PPF accounts, including your children’s, will remain Rs. 1.5 lakh. Also, deduction will be available only up to Rs. 1.5 lakh. Returns from PPF are tax-free.

The only scheme that lets you invest in your child’s name is Sukanya Samriddhi Account (SSA), but only if you have a girl child. SSA is government’s social welfare scheme meant to promote the interests of girl children. Under this scheme, parents or legal guardians can open one account in the name of one girl child and maximum two accounts in the name of two different girl children. SSA offers a tax-free annual interest of 8.1% compounded annually, and contribution qualifies for tax deduction under Section 80C of the Incometax Act, 1961. Returns from SSA are more than what other similar avenues such as PPF and National Savings Certificate provide.

CLUBBING OF INCOME

Remember that even if you invest in your minor child’s name, the income or returns will get clubbed with the income of the parent for taxation under Section 64. It will be considered income in the child’s hands only if he or she is above 18 years of age.However, there is a small deduction available in case you invest the money in the name of your minor child. You can claim an exemption up to Rs. 1,500 per child every year, for a maximum of two children, under Section 10(32).

PLANNING RIGHT

For some of you, buying products in the name of a child may help with goal based investing and ensuring that you stay the course and do not touch this money.

Some experts believe that investing in name of child make parents more disciplined. It adds a natural purpose to the investment and substantial longevity to the investment as parent’s expectations of the holding period is naturally set in their mind.There is a magical force that prevents dipping into these investments and, hence, you are more likely to achieve the goal as a result of this discipline.

Also, it can help you consolidate the small amounts of money that children receive from friends and family on special occasions. The parents tend to end up investing a higher amount, with the cause of investing for children.

But investing in a child’s name may involve additional paperwork both at the time of investing as well as exiting. You may also require to open a separate bank account in the name of the child for certain investments. Apart from that, keep in mind that once your child turns 18, he or she will get access and rights over the investments.

What can also work is creating an additional savings bucket for your children and reminding yourself why you have created the bucket.Whether you invest in your child’s name or create a separate bucket, make sure the instrument you choose fits into your portfolio and does not hamper your asset allocation. Also, ensure that the maturity period or lock in that the investments may have are in line with the child’s needs.

Hope you enjoyed reading this edition.

Disclaimer:

The views of the authors/publishers should not be construed as advice. Investors must make their own investment decisions based on their specific investment objectives and financial positions and using qualified advisors as may be necessary. Opinions expressed in various articles are not necessarily those of Wealthmax Enterprises Management Private Limited(WEMPL) or any of its directors, officers, employees and personnel. Consequently, WEMPL or any of its directors, officers, employees and personnel do not accept any responsibility for the editorial content or its accuracy, completeness or reliability and hereby disclaim any liability with regard to the same. Stock picks and mutual fund snapshots are not exhaustive and should not be construed as recommendations.