The rate of inflation in education has been much higher, at about 11–12% percent, even while the country's consumer price inflation has been circling at 5–5.6 percent for the past few months. This suggests that the expense of education could double every six to seven years.
Let's look at an example to better understand the effects of education inflation. Let us examine a private engineering college that billed tuition and fees of Rs. 1 lakh annually in 2010. The same college is now charging Rs 3 lakh a year in 2022, which is 200% more than it did in the previous year. In addition, if you want to send your child abroad for school, you need to factor in inflation as well as the devaluation of the rupee, which will affect your outgoing expenses by at least 4-5 percent annually.
Setting a goal for your child's further education is crucial in light of this. Here are some suggestions for investing in your child's higher education, given the uncertainties around the amount of money to set up for a variety of courses.
Goal-based SIPs
Strategic planning is crucial to preventing education inflation and accumulating a sizeable fund for your child's postsecondary education. Establish clear educational objectives and project future expenses while accounting for inflation.
"Establishing a goal-based Systematic Investment Plan (SIP) in large balanced funds is a very successful tactic. These funds, which invest in a combination of debt and equity, provide growth potential while controlling risk, which makes them appropriate for long-term objectives like saving for college.Contributions to your SIP should be automated to guarantee steady savings growth, which is essential to meet the escalating costs of school. Furthermore, diversify your investment portfolio to reduce risk and adjust to changes in the market," said Chakravarthy V., Cofounder and Director, Prime Wealth Finserv Pvt Ltd.
Accept equity-linked savings plans (ELSS) as an option
If you have a 15-year time horizon, investing in equity would be the best choice for building a corpus through equity-linked savings schemes. Equities are thought to be the best asset type for long-term investing since they enable you to generate returns that exceed inflation.
If you want to take advantage of the tax benefit offered by Section 80C of the Income Tax Act, it is advisable to invest in a pure equity fund, such as a flexi-cap fund or even a tax-saver fund (ELSS), for such an extended duration. If you have never invested in stocks before or are new to investing, you can begin with an aggressive hybrid fund. These funds include some debt allocation, which lowers the fund's volatility. Value Research states that after you are at ease with the ups and downs of the stock market, you can switch to a tax-saving fund or a flexi-cap.
Start investing at least 10-15 years ahead of time
To ensure that the objective can be comfortably reached without placing additional strain on resources or lifestyle, a person should ideally begin investing for their children's higher education at least 10 years ahead of time.
"When systematic risks are well-planned for, they can be reduced by staying invested, building up a sizable corpus, and outperforming inflation.Avoid investing in low-risk, low-return asset types such as FDs, PF, and life insurance plans, as they will not be able to keep up with the rising cost of schooling in the long run. To ensure that you can afford these fees when the time comes, get the advice of an investing specialist to assist you plan for this objective, estimate the inflationary cost, and then allocate a monthly investment into a reputable mutual fund," said Mayank Bhatnagar, Co-founder and COO, FinEdge.
Value Research provides an illustration to clarify this: If your child's education objective is to earn a degree and post-graduation fund of Rs 30 lakh at current pricing and you have just 10 years to achieve this goal, then by the time your child is 18 the same degree would cost Rs 77.8 lakh, assuming a 10 per cent inflation rate. That would necessitate a Rs 33,830 monthly SIP in a fund with an annualized return of 12%. If you had begun five years earlier, you would have need a monthly commitment of Rs 25,085.
Value Research now suggests that, if you can get started early, you should start equal SIPs in three flexi-cap funds to help you reach your target. You can utilize a combination of two multi-cap and one mid-cap fund if you are more risk averse. However, you can still employ SIPs in hybrid funds if you missed out on the early start but have five years remaining.
Reject gimmicky child Ulips and embrace basic mutual funds
These gimmicky "child" programmes are not nearly as effective in helping you reach your child's education goal as plain vanilla mutual funds chosen for their track record. "Insurance firms shouldn't offer child ULIPs for three reasons. They redirect a portion of your investment towards a term insurance policy, which is available separately for far less money. They have minimum lock-in periods of five years, which means that even if the plan performs poorly, you won't be able to move to a better one. It is also challenging for you to compare the performance of various ULIPs in order to select the optimal plan because of opaque labelling and prices. We also advise against investing in mutual fund special "child schemes" because doing so may result in large exit loads and subpar returns," noted Value Research in a note.
Additionally, make sure you purchase enough term insurance so that your family will have enough money guaranteed to cover your child's college expenses in the event of your death.
Investors should aim at picking up stocks with a low-price earnings ratio (PE ratio)
When making investing decisions, the phrase "PE ratio" is often employed. A P/E ratio is, in essence, the ratio of a share's market price to its earnings per share. The ratio indicates the multiple of a share's market price over its earnings. One perspective holds that investors' returns are higher when the PE ratio is lower since there is a greater probability of appreciation, and vice versa. Additionally, the element of danger rises. Some, however, contend that it is the opposite way around. These guidelines do have certain exceptions, though. The valuation ratio of a company's current share price in relation to its earnings per share is called a PE ratio. You are paying more for a projected stream of earnings the higher the PE. Even when a company doesn't distribute its earnings as dividends, but instead keeps them to finance expansion in the future, investors are typically prepared to pay a higher PE for businesses they believe will grow more quickly than average.
"A company with a high PE ratio is typically more expensive than one with a low PE ratio since the former requires paying a higher multiple than the latter's earnings. Greater PE ratios are sometimes linked to "growth stocks," or businesses that are expanding at a quicker rate than the industry average. Investors anticipate increased earnings in the future for the company. This metric is typically used to determine if a stock is trading at fair value, is overvalued, or is undervalued. Given the current state of the market, investors might select some strong low-priced equities with significant growth potential," said Sonia Gupta of Bharati Vidyapeeth University in a study titled 'Investment Strategy to Beat Inflation: Critical Evaluation of PE Ratio.'
Diversify
Use the Sukanya Samriddhi Yojana to your advantage to set aside money specifically for your daughter's education, and invest in Public Provident Funds (PPF) for steady returns. For parents of girls, this is a government-sponsored little savings plan that is tax-free. For the January through March quarter of 2024, it provides a tempting interest rate of 8.2%. Under Section 80C, the principle amount you invest is tax deductible up to Rs 1.5 lakh, and any interest you earn is tax-free as well.
