Investing in tomorrow: A guide to securing your newborn's higher education

• Historical data suggest an annual education inflation of 10-12%.
• Start SIPs in diversified equity funds for the child's future goals.
• The goal must be periodically re-evaluated for the changing costs and inflation rate.

The birth of your newborn is undoubtedly the happiest occasion of your life. But with great joy comes great responsibility. As a parent, you are responsible for the well being of your child and that includes providing him or her with good quality higher education.

Expenses associated with education include various aspects, such as university tuition, tutoring, transportation, and accommodation charges. While there isn't a distinct inflation index for education, historical data suggests an annual inflation rate of approximately 10 to 12%. This is higher than normal inflation.

To estimate the future cost of their child's education, parents can project the current course expenses by applying the mentioned inflation rate. For example, if the current cost of an engineering degree is ₹15 lakh now, 18 years later it would cost around ₹1.15 crore at 12% inflation.

Start early

The corpus you need to build may seem very big, so it is key to start early. Starting early lets you harness the power of compounding right from day one. At birth, a child is likely to receive a lot of monetary gifts from friends and relatives. Rather than keep the cash idling away, one should use this money to kick start investing in the child’s future.

Mutual funds the way to go

Mutual funds are vital for saving for a child's education due to their diversified investment options, expert management, and potential for long-term growth. “Start SIPs in diversified equity funds for the child's future goals. The child will be the beneficiary of these investments made by the legal guardian,” says Rahul Jain, president and head, Nuvama Wealth, a wealth management firm.

Insurance and mutual fund companies sell ‘child plans’ which are either issuance plans or mutual fund schemes. These plans often have a ‘child’ prefix and are meant to tempt parents into investing in them.

For most of them a payout is meant only when the child turns 18 years and they are designed in such a way that parents cannot touch the money before the child turns 18. But one should not fall for such schemes, since investing through mutual funds is a much better option.

“Beware of schemes like 'XXX Childcare' that exploit the emotional quotient of investors, as they are often expensive investment products,” says Deepak Gagrani, Founder of MADHUBAN FINVEST.

Asset allocation is key

The principal of asset allocation applies to education as well. “In case of a girl child, one should definitely consider investing up to ₹1.5 lakhs annually in Sukanya Samriddhi Yojana,” says Gagrani. The investments are eligible for deductions under Section 80C and interest income is tax free. . Otherwise, regular investments in public provident fund (PPF) is a good idea to get debt exposure.

“The goal must be periodically re-evaluated for the changing costs and inflation rate. The portfolio must be reviewed at least once a year to ensure that it delivers the expected returns,” says Jain. If possible, the services of an investment advisor must be engaged.