Save early to inflation-proof your child's higher education

If you want to buy a car and haven't accumulated enough money, you may settle for a lower variant or you may want to buy it a year later. However, you can’t postpone your daughter’s education. In such circumstances, it is better to start early so that you can manage it better. "If you start early you benefit from magic of compounding. Long time frame also lets you invest in a risky but rewarding asset class such as equity," says Jitendra PS Solanki.

For example, if you want to accumulate Rs 83.55 lakh (target sum in the above example) in 13 years, at 12 percent rate of interest you have to invest Rs 23,568 per month. Here we are assuming that the investor wants to play conservative and want to raise money at least two years ahead of schedule.

If you are forced to accumulate same amount at same rate of interest in 10 years, then you have to invest Rs 37,645 per month. Starting late by three years make you increase your monthly contribution by almost 60 percent.

A longer time frame also gives you more elbow room to tide over tough times. There are times when one faces medical emergencies or job loss. In such circumstances, the investments may take back seat. Though one should have emergency fund that should pay for such times, one may not have perfect solutions to all problems. And hence more the time frame in hand better it is.

This could be the tough choice for many individuals. When the markets start rallying greed sets in and when they fall the fear takes over. The volatility associated with equity and equity mutual funds cannot be done away with. Hence it is imperative to keep a track of your investments. "Most of these investments made to fund your child’ education are of buy and hold nature. It makes sense to keep reviewing them from time to time," says Birani.

In a good year you may also want to shift some money away from equity mutual funds and such other risky products to a less risky bond fund. Thus you take home some money and not exposed to the vagaries of the market.

"At least two to three years before the stipulated time, start moving away from the high risk investments to low risk investments," says Solanki. While some experts are of the view that one should move gradually from stocks to bonds over a period of time, the more conservative lot prefers to shift all the money to safe fixed deposits and liquid funds at least two years before the course begins. The idea here is not to take any risk with your child’s education.

Do not forget this. While accounting for your insurance needs, take into account the present value of this goal at risk free rate of interest. Buy a term insurance policy to that extent. In the above case, the sum assured should be equal to Rs 39.20 lakh assuming risk free rate of interest at 6 percent for 13 years.

A term life insurance policy on the life of a sponsor ensures that the kid completes his education even if the sponsor is not around.

"Avoid purchasing low return traditional life insurance policies," says Birani. "Some parents also make bank fixed deposits in their child’s name. But it does not help, given the poor post tax return they offer."

If you are not comfortable with high return risky investment avenues such as equity funds, do consider investing in tax free investments options on fixed income side. "PPF is a very good way to accumulate money for your child’s education. You can open one in your child’s name. For girl child, Sukanya Samriddhi Yojana can also be tapped," says Solanki. However, these products have rules pertaining to their maturities and hence opt for them if your goal’s time line and the product maturity are in line with each other.