Should we plan for our Children’s future?

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Hope you all had a nice weekend.

In this article, I would like to talk about how to plan & be prepared for your Children’s future.

Kindly read till the end as it will present some alarming figures….alarming to me as well.

There are 2 major goals important from the perspective of our children. First one is their education & second their marriage.

When I was a kid, my father used to pay Rs. 200 per month or Rs. 2400 per annum as my school fees for 2nd Standard (Class) in 1991. Now, the school fee is around Rs. 1 to 1.5 Lakh p.a or even more depending on the school. Hefty donations have to be paid to get admission in some schools. From Rs. 2400 p.a in 1991 to Rs. 100000 in 2016, its an increase of 16% p.a. Education cost is increasing @ 16% p.a on an average. Money that is deposited in Fixed deposits, Recurring Deposits, LIC policies, NSC, NPS, PPF, EPF, Sukanya Samriddhi Yojana is growing @ ~ 8.5% p.a. So, the question arises – Should we save for child’s education whose cost is rising @ 16% p.a in financial products whose rate of return is only 8.5% p.a?

Way back in 2003, cost of MBA education in IIM was Rs. 3 Lakh. Now it is around Rs. 25 Lakh. An increase of 18% p.a. Our investments in above popular financial products are not growing anywhere closer to this rate. So, the same question comes back to my mind.

Let me take my own example. I have a kid who is 1 year now. He may go for MBA or MBBS or equivalent degree at the age of 21. I have 20 yrs to save for his higher education.

Current cost of MBA in a premier institute is ~ Rs. 25 Lakh. After 20 yrs, it will cost me        ~ Rs. 4.86 Crore (if cost increases @ 16% p.a as is the case in the past).

Now at different rates of return, how much do I need to invest every year to accumulate   4.86 Cr in 20 yrs? See below table.

Rate of return from investment

Investment p.a required

Investment p.m required

8.5% p.a

9.26 Lakh

77,241

12% p.a

6.02 Lakh

50,240

15% p.a

4.12 Lakh

34,414

18% p.a

2.81 Lakh

23,432

20% p.a

2.17 Lakh

18,097

One can observe from the above table that, the higher the rate of return from your investment, the lower the amount to be invested per annum or per month to accumulate the required amount (4.86 Cr in my case).

Education cost is only going to shoot up beyond our imagination in the future. Inorder to provide good education to our children, its wise to invest from today onwards in good Financial products which will give better returns than the traditional products stated above which offer 8.5% p.a which is not good enough to reach the goal.

There are some good Children Gift schemes available which have given good returns. HDFC Children’s gift fund has given annualised returns of 17.11% p.a in the last 15 yrs.

Axis mutual fund has also launched Axis Children’s gift fund recently in Dec-2015. I believe these are better products to save for children’s education as their returns are superior compared to traditional products, which also means much smaller amount has to be invested every month / year to achieve the same corpus for higher education.

Now, coming to the next important goal – Children’s marriage.

Marriage expenses are also increasing at a double-digit rate. Inflation in marriage expenses is ~ 14% p.a. For example, if the cost of marriage is 25 Lakh today. Same would cost you 6.61 Crore after 25 yrs. Is it possible to achieve this corpus by investing in traditional investments which give 8.5% p.a?

The only way to achieve the required corpus for Children’s education & Marriage (both of which are long-term goals) is by investing in products which gives returns of ~ 15% p.a and by starting your investments from today and by staying invested for long-term.

Conclusion:

  1. Start SIPs in Children’s Gift Funds from any Asset Management Company for your Children’s future.
  2. Evaluate all the existing investments that you are doing for your Children’s future and check if they are giving required returns.
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