How to plan your child's education fund - Forbes Advisor INDIA

How to plan your child’s education fund – Forbes Advisor INDIA

One of the most critical goals in the life of any parent is to ensure a bright future for their children. The path to a promising future is paved with obstacles; it requires careful planning and research, as setting up an education fund for your child with skyrocketing education expenses can be difficult.

Your life as a parent would be much easier if there was a particular investment instrument or basket of investments readily available that could help you plan your child’s educational corpus more efficiently and without spending hours researching. Here’s how a model portfolio works for your child’s college planning.

Costs involved in educational planning

Tuition: The main cost to start educational planning is tuition. The tuition fee depends on several factors such as the country, the university or college selected, the ranking of the university, the course chosen, etc. From year to year, tuition fees have increased, making it difficult for parents to pay them.

The rise in tuition fees is the direct result of education inflation. Take the example of IIM Ahmedabad to find out how tuition fees have changed drastically over the years.

Living expenses: When children plan to go abroad or even to another city in the same country, a considerable part of their educational expenses is devoted to living expenses. These expenses include their monthly house rent, grocery costs, food costs, water and utility bills, etc. An additional cost would also be purchasing medical insurance for your child.

The rent for a one bedroom house in Mumbai in 2012 was INR 26,000 which rose to INR 41,000 in 2021. This shows how much rental prices have risen and will continue to rise in the future .

Trip costs: Another sub-cost included is travel – both international and domestic. The cost of flying from India to anywhere abroad is no joke. In the country of study, domestic travel, such as applying for a monthly pass for a bus or train, should also be considered when planning education funds. Recently, school bus fees have been increased by 30-40% in some cities in India due to soaring fuel prices.

Miscellaneous costs: There may be other expenses like going out with friends, buying books, study materials or stationery, etc. An additional provision for these miscellaneous expenses must always be maintained.

What is a Model Portfolio?

A model portfolio is a collection or basket of assets that uses a specific investment approach to target a particular risk-reward ratio to achieve the investment objective. These baskets are created based on extensive research. Each portfolio has a mix of different asset classes for portfolio diversification. Typically, there are many investment instruments to align with your goals and objectives, but model portfolios offer investors the ability to invest with little management effort.

Factors Affecting a Model Portfolio:

  1. Investment objective: Always tie your investments to a goal. When you do this, you know what you’re saving for, which helps you plan and invest effectively. In this case, the investment objective is your child’s higher education.
  2. Disposable income: You also need to know how much you can set aside to achieve the investment goal above. Disposable income is the money you have after incurring all expenses, IMEs, and insurance premiums. With this, depending on your investing style, you will be able to estimate how much corpus you can achieve.
  3. Risk appetite: Risk is one of the main factors affecting your investment journey. You can decide your portfolio’s asset allocation based on your risk appetite. Even when creating model portfolios, different models are created for different risk baskets.
  4. Investment horizon: Your investment horizon is the period between the start date of your investment and the date you reach the goal. Your investment horizon is based on your desired corpus, which estimates how much you need to invest to achieve the same result in the given time period.

Benefits of a model portfolio:

  1. Diversification: A model portfolio allows you to invest in different asset classes to diversify your overall portfolio. Diversification occurs by spreading your investment across different assets in such a way that they balance out during extreme market volatility. For example, during the covid period, the transport sector was hit hard while the pharmaceutical industry experienced a boom. So, if you had exposure to transportation stocks, this loss would have been offset if you also had exposure to pharmaceutical stocks.
  2. Detailed research and analysis: Model portfolios are designed by experts and industry leaders. Extensive research and technical analysis go into creating detailed investment strategies. The fundamentals of the assets are carefully evaluated before making an investment plan.
  3. Rebalancing: The model portfolios are reviewed periodically to ensure that they meet their benchmark and operate effectively. The proportion of asset allocation changes and overall portfolio risk is minimized by rebalancing. Portfolio rebalancing ensures that whenever markets are highly volatile, portfolio volatility is optimized.

Conclusion

Starting early gives you a head start in planning for your child’s higher education. Your wallet has the power to compound this way. There are also other benefits; it lets you start small and with an appropriate asset class based on your risk appetite, and helps you build your corpus faster and more efficiently.

Each individual is different. A single model portfolio may not be suitable for all investors. If your risk-return expectation matches the model portfolio, this is the best option for you. Having a goal-based approach gives you a detailed, personalized portfolio plan that’s also periodically rebalanced to help you achieve your goal smoothly.

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