By Vineet Kumar 
Building an Education Fund for Your Child: A Step-by-Step Guide
Creating a fund for your child’s higher education is one of the most important financial goals for any parent. It requires a well-thought-out plan, discipline, and the right investment strategy. Here’s how you can get started:
Step 1: Define Your Goals
Before anything else, take a step back and define your objectives clearly.
1. Estimate future costs:
Research the current cost of higher education. For example:
A 4-year engineering degree in India might cost around ₹10-15 lakhs today.
A master’s degree in the US could set you back by $50,000 annually (approx. ₹40 lakhs per year).
Factor in inflation, which for education is typically 6-10% annually. For instance, if a degree costs ₹15 lakhs now, it might cost nearly ₹40 lakhs in 15 years with 8% inflation.
2. Determine the timeline:
If your child is 3 years old, you have 15 years to save for their undergraduate education. This timeline will influence your annual or monthly savings goal.
Step 2: Calculate the Target Corpus
Once you have a cost estimate, calculate how much you’ll need by the time your child starts college.
Use the future value formula: You can use online financial calculators or consult an advisor for precise estimates.
Account for inflation: Multiply today’s cost by the inflation factor.
Example: ₹10 lakhs today with 8% inflation for 15 years grows to about ₹31.7 lakhs.
Step 3: Assess Your Current Financial Situation
Take stock of where you stand financially:
1. Review existing investments:
Do you already have funds set aside for education? For example, a fixed deposit of ₹5 lakhs could reduce your target savings.
2. Calculate the shortfall:
Subtract your current savings from your target corpus. If your goal is ₹30 lakhs and you already have ₹5 lakhs, you need to save ₹25 lakhs over the remaining years.
Step 4: Choose Suitable Investment Options
Your investment choice should align with your timeline and risk tolerance.
1. For long-term goals (10+ years):
Equity Mutual Funds: They offer higher returns (10-12% annually) over long periods. For instance, a monthly SIP of ₹10,000 for 15 years at a 12% return can grow to around ₹50 lakhs.
Public Provident Fund (PPF): This government-backed scheme has a 15-year lock-in and offers tax-free returns of 7-8%. It’s a great low-risk option.
2. For medium-term goals (5-10 years):
Debt Mutual Funds: These provide stable returns (6-8%) and are less volatile than equities.
Fixed Deposits: Safe but often yield lower post-tax returns compared to debt funds.
3. For daughters:
Sukanya Samriddhi Yojana: This government scheme offers a high-interest rate (currently around 8%) with tax benefits.
4. Optional:
Child-Specific ULIPs: These combine insurance and investment, but watch out for high fees and mediocre returns.
Step 5: Build an Investment Strategy Based on Risk Tolerance
1. Younger parents:
If your child is under 5 years old, you have time on your side. Go for higher equity exposure to maximize growth.
Example: 80% equity, 20% debt.
2. Closer to the goal:
If your child is already a teenager, prioritize safer options like debt funds or PPF to protect your corpus.
Step 6: Automate Savings and Review Annually
1. Automate investments:
Set up a SIP (Systematic Investment Plan) or recurring deposits. This ensures disciplined investing without the temptation to spend elsewhere.
2. Annual review:
Markets and your personal situation can change. For instance, if your mutual funds are underperforming, rebalance the portfolio.
Step 7: Protect Your Plan with Insurance
1. Adequate life insurance:
Ensure you have a term insurance plan that covers your child’s education in case of any unforeseen events. For example, if your target is ₹30 lakhs, your life cover should exceed this amount.
2. Education insurance plans:
Consider policies designed to pay a lump sum for education even if you are not around.
Step 8: Adjust and Adapt
Stay flexible and adapt your plan as needed:
If education costs rise faster than expected, recalculate your target.
If you get a salary hike or bonus, consider increasing your SIP contributions.
Step 9: Withdraw Strategically
1. Shift to safer options near the goal:
As college years approach, move funds from equity to debt to minimize risk. For instance, a child aged 16 would benefit from 80% debt exposure.
2. Be tax-efficient:
Plan withdrawals in a way that minimizes taxes. For example, PPF and Sukanya Samriddhi withdrawals are tax-free.
By starting early and following these steps, you can ensure your child has the financial resources to achieve their educational dreams, whether it’s an MBA from Harvard or a degree from IIT. Remember, consistent effort and periodic reviews are the keys to success!
