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Goal Based Investing

Planning for Your Child’s Education & Marriage

Planning for a child’s education and marriage are the most important goals that parents have in their working lives.

Over the past few years the cost of providing for child’s higher education has grown stupendously. And, it costs a fortune to get your child married.

It requires systematic planning and lack of it can land you on the wrong footing sooner than later. It requires a set plan and the perseverance to follow it which will go a long way to secure your child’s future. The financial market has umpteen number of child plans however, a scientific approach has to be followed to achieve this goal. The five step approach highlighted below will guide you through this process.

How to plan for your child’s future?

Planning for your child’s education and marriage has five simple steps.

  • Setting Target Date: The first step is to find the time left to achieve the goal. This is an important step as it will directly influence the amount that can be saved and also the asset allocation. Ideally, fund requirement for child’s higher education starts after the age 18 for child’s marriage starts after the age of 21.
  • Finding the current cost of education / marriage: We have to set a target amount in today’s terms that is we have to determine how much it will cost today to provide for the child’s education. Let us assume that the funds required as per today’s value is Rs.7 lakhs.
  • Finding Target Amount: Inflation is a silent destroyer of wealth and as a result, the cost of goods and services has been increasing at a steady pace. The education costs and marriage costs also increase as inflation increases. In other words, inflation destroys the value of your money. Hence, we need to take cognizance of the same and factor it while designing our investment plan. Having decided the target amount in today’s terms, project it till the set target date using an inflation estimate. The table below shows the estimated cost at an inflation rate of 7% (assumed)

    Estimated Cost at an assumed inflation rate of 7%
    Current Cost End of Year
    5 10 15 20 25
    7,00,000 9,81,786 13,77,006 19,31,322 27,08,779 37,99,203

    Well, this is quite alarming. At 7% assumed inflation, your Rs.7 lakhs gets inflated to Rs.37 lakhs in 25 years. The cost has gone up by more than 5 times.

  • Estimate the return which you can generate over your investments: The returns generated out of your portfolio will depend on the asset allocation that you choose. This in turn depends on your risk profile, investment horizon, and expertise to understand these financial products. For instance, a conservative investor who has capital protection as a priority will have a higher debt component in his/her portfolio. In Long run, on an average debt investments could generate 7%-8% pre tax returns. On the other hand, an investor with a higher risk appetite can allocate a higher proportion to equity shares, equity mutual funds, Exchange Traded Funds (ETFs) etc. Equity investments are expected to deliver around 12% returns over the long run.
  • Calculate current investment required: Once the target amount has been decided and the rate of return estimated, a back ward calculation needs to be done to arrive at the amount of investment required to achieve the estimated corpus. This requires a certain amount of complex calculation and your financial planner can help you arrive at the same.
How to plan for your child’s future?

Asset allocation is dependent upon various factors like Risk profile, return requirements and time horizon. The earlier you start, the greater is your risk appetite as you have a long time horizon. The power of compounding works best when you start early. During the early ages of your child, the allocation to equities is the highest and as your time horizon shortens, the equity component has to be gradually reduced.

Gold always plays an important part in marriages, especially in India. One can accumulate gold in a systematic manner and it has to be considered as a part of the asset allocation plan.

Ideal asset allocation for child’s education

Age Group Equity (%) Debt (%)
0 - 3 years 80 20
4 - 7 years 65 35
8 - 11 years 45 55
12 - 15 years 25 75

Ideal asset allocation for child’s marriage

Age Group Equity (%) Debt (%) Gold
0 - 5 years 65 20 15
6 - 11 years 60 25 15
12 - 16 years 45 40 15
17 - 21 years 30 55 15
Key Points to Remember:
  • Before planning for your child’s education or marriage, make sure that you have adequate life insurance. This will ensure that your family is well protected even in case of any unpleasant event.
  • Sticking to the plan would be the deciding factor to enable you to reach your goal.
  • Make the right asset allocation and have the conviction to stick to it under any circumstance.
  • Review your investments periodically in order to ensure that your investments are in line with your objectives.
  • Finally leave some amount of flexibility in your plan. This will allow making changes in case of any change in your child’s future plans.