Inflation may be down to nearly zero but a major expense of the average Indian household is growing at a fast clip. The cost of higher education is already high and rising at 10-12 per cent a year. Children's education is one of the biggest cash outflows that families must plan for. A four-year engineering course costs roughly Rs 6 lakh right now. In six years, the cost is likely to touch Rs 12 lakh. By 2027, it would cost Rs 24 lakh to get an engineering degree.
The earlier generations had it easy. Competition was low and the fee in government institutions was modest. Now, the heightened competition for admission to quality government-run institutions is forcing students to turn to more costly private institutions.
"In the future, global education brands may come to India and their fees will be very high.
What common mistake people do they buy insurance products for child education.The returns on these products are around 5-6% annualized which do not even beat the inflation .do not mix insurance with any investment product.
One obvious solution is to start saving early. The individual will not only be able to amass a larger sum, but the money will also gain from the power of compounding. A corpus of Rs 1 crore may seem daunting, but it's possible to save this amount with an SIP of Rs 9,000 for 18 years in an equity fund that gives a 15 per cent return. "Since the rate of education inflation is so high, you need compounding to work for you over a longer period.
A delayed start not only yields a smaller corpus but can also jeopardise other financial goals. If you start investing for your child's education in your 40s, you are likely to fall short of the required amount. Often, parents dip into their retirement savings to fill the gap, but this can be a risky move. "Just because you have funded your children's education, there is no guarantee that they will look after you in your old age.
When one is planning to send the kids abroad to study, there are a few things additionally that parents should take care of :
The Amount Of Corpus : The amount required for sending the child abroad for studying is anywhere between 10 to 15 times the cost of education in India. The cost varies with what university is being looked at and what countries are being considered. For eg: Education in Singapore might be cheaper than one in the US.
Tuition/ Boarding/ All : You will need to think about what part of this funding will be done by you, what part of it would be a loan and what kind of scholarship you should look at to ensure that the other important goals are not impacted negatively. You must be upfront with your child on this front to ensure expectations are set realistically.
Currency : Because one is unsure of which country the money will be required in, one of the options is to invest in a fund that is globally diversified. This way you protect the portfolio by diversifying it across various countries and currencies. The investment must be done systematically though. In the past few years we have seen that currency has swung quite sharply and hence has a greater impact than inflation.
Inflation : Though inflation is lower in developed countries than in the developing ones, the education inflation is still quite high and we would assume a 10% inflation realistically. Another factor to consider is change in rules -- protectionism may result in having more seats for local students, thus pushing up costs for international students.
Investments : The investment portfolio for a goal like this should be diversified to include multiple countries and currencies whilst at the same time cushioning against risks. The portfolio should be re-examined from time to time to ensure movement to safer assets as the goal comes closer. We normally recommend a mix of Indian equities, debt and investing in international funds for these goals.
Expenses on travel : Since now they are living in another country, the travel expenses might shoot up if you are traveling to be there or if they are visiting you. The number of visits every year could be pre-set too to fit the budget. It is also a possibility that they would want to explore the country they are living in and hence that may be another added expense although not a necessity.
Healthcare : Most universities do offer health insurance at an additional cost, do ensure that this is opted for else in case of any illness etc, the outgo may be huge. Plus it is compulsory in some countries to have health insurance. Like most goals, this goal too is easily achievable if it is planned for early else it can be a challenging task and might not be less than a steep uphill climb