I want to take an insurance plan for my child’s education.Which is a good one?
The cost of higher education is increasing day-by-day, hence, if you don’t plan well, you could fall way short of the required corpus when your child is ready for college. Moreover, for engineering and medical aspirants, the cost starts even while the student is in high school. Coaching institutes also charge hefty fees for preparing the students for the entrance exams, Insurance plan
This sharp spike in fees is a wake-up call for parents saving for the higher education of their children. Higher education costs have the highest inflation rates in the country. Hence, parents need to realise that it is going to be an expensive affair.
The benefits of an early start cannot be stressed enough when you are saving for a long-term goal.
If your child is 3-4 years old, you have 13-14 years to save hence you can take some risk and invest in equities as in long term equities give higher returns. You can start Systematic Investment Plans (SIPs) in equity funds.
Starting early helps you accumulate larger sums that may not be possible later in life. The multiplier effect in the power of compounding comes from the investing time horizon; longer time horizons have a higher multiplier effect.
Starting early also put the lesser burden on your finances because it requires a smaller outflow. Also, you may not be able to invest in certain assets if the time horizon is too short. If you delay investing, not only do you have to invest a higher amount every month, but it also reduces your ability to take risks.
The investment strategy changes if your child is a little older. Since you have only 5-9 years to save; the risk will have to be lowered. The ideal asset mix at this stage is 50% in stocks and 50% in debt. Instead of equity funds that invest the entire corpus in stocks, go for balanced funds that invest in a mix of stocks and bonds.
If your risk appetite is lower, monthly income plans (MIPs) from mutual funds can be a good alternative. These funds put only 15-20% of their corpus in equities and are therefore less volatile than equity or balanced funds. However, the returns are also lower than those of equity funds.
However, remember that returns from equity and balanced funds are tax-free after a year, while the gains from MIPs are taxed at 20% after indexation benefit.
For debt portion, start recurring deposits (RDs) that would mature around the time your child is scheduled to apply for college. However, if you are in the highest 30 % tax bracket, avoid RDs and start a SIP in a short-term debt fund. These funds will give nearly the same returns as fix deposits but are more tax efficient if the holding period is over three years.
It is also important to review the progress of your investment plan. You should check every year if you need to step up your contribution towards the higher education kitty.
For parents of teenaged children, the investment strategy should focus on capital protection. With the goal barely 1-4 years away, you cannot afford to take risks with the money accumulated for your child’s education. The equity exposure at this stage should not be more than 10-15%. As you come closer to your target, you should stop SIPs in equity funds and shift to a short-term debt fund. This is because a sudden downturn in equity markets can reduce your corpus and upset your plans.
If you face a shortfall, don’t dip into your retirement corpus to fill the gap. Instead, you should take an education loan with the child as the co-borrower. Apart from keeping your retirement savings intact, it will inculcate a savings discipline in your child after he takes up a job.
When saving for your child’s education, do remember that the whole financial plan depends on regular contributions by you. But what if something untoward happens to you? The entire plan crashes. The only way to guard against this is by taking adequate life insurance. And term insurance plan even doesn’t cost too much. And that is too small a price for something that safeguards your biggest dream.