Hansi appearing on CNBC discussing childrens education

CHILDREN’S EDUCATION PLANNING

Saving for their children’s education is amongst the top financial goals for many Indians. CNBC TV18 invited Hansi, along with Jyotsna Singh of Kotak Wealth, to address the following questions – When should you invest for your child, how much should you invest, should you invest in own or child’s name, should you make a separate investment for your child etc.

This post is a summary of Hansi’s appearance on CNBC TV18’s Smart Money Show on 26 February 2021. Access the recording here – https://www.cnbctv18.com/personal-finance/smart-money-how-to-plan-your-childs-future-8437381.htm

Should parents plan children’s education as a separate goal?

While goal planning has become very popular for the ease-of-understanding it provides to investors, it can also add complexity to portfolios if we have too many goals. It might be better to group goals by importance (need to have, good to have and dream to have) and time horizon (short, medium and long term).

Depending on when parents start planning for it, children’s education is likely to be ‘need-to-have in the long-term’ along with retirement.

How much to aim for?

Before parents jump in to sacrifice their current or future lifestyle, it’s worthwhile breaking up ‘education’ into its component parts.

Education is a composite of –

  1. Actual learning of technical skills or education
  2. Social or soft skills through student life
  3. Certification
  4. Alumni network

The cost for primary and secondary schooling tends to be a function of local demand and supply of good schools. For now. There are many edtech startups already disrupting the coaching industry, so it’s possible that they address the high cost of schooling as well. On the other hand, the higher education industry is already being shaken up by a few trends –

  • You can learn many technical skills for free somewhere on the internet
  • MOOCs started slow but are gaining traction
  • Universities are going online – it will be interesting to see what happens post – pandemic

All this is relevant because it should affect the cost of education.

In most financial planning models, financial advisers assume a higher rate of inflation for education and health than for general inflation. So if parents are planning for their toddlers, they have to have a view on how the cost of education will change over the long term. They may have strong views on public vs private education. Personally I believe I want to give the best I can afford – which means not taking on debt for schooling at least.

In terms of numbers, the total cost of education could add up to INR 60 lakh to 1 crore (~USD 80k – 120k) per child. Of course, this could be lower or higher depending on the economic status of the parents too.

When to start and how much to save for investment?

Jyotsna Singh shared a table, courtesy Kotak Wealth –

How to invest for children’s education goal?

Depends on when they are starting. If they start early enough, I would invest in equities, and then slowly shift to more balanced portfolio as we get closer to the goal date.

I use a house analogy to explain asset allocation. Note education could be a medium to long term goal depending on when we start planning.

Governments should and may encourage this. For example, in Australia there are education bonds which is basically a tax advantaged wrapper offered by an insurance company for a min 10 year investment into an underlying mutual fund. In India, the insurance companies do offer insurance/investment bundles but these are not as transparent and researchable…so I would not invest even if there is some tax advantage.

Then there are ‘solution-oriented’ funds offered by mutual fund houses. These are along the lines of ‘lifecycle funds or target date’ in that they are diversified funds and could possibly change asset allocation to more conservative closer to goal date.

I think it’s simpler to put together a portfolio yourself and periodically rebalance in early years and shift in later… this is easily do-able especially if you have an adviser anyway.

If they start early enough, I would invest in equities, and then slowly shift to more balanced portfolio as we get closer to the goal date.

 10-15 yrs5-10 yrs0-5 yrs
Equities100%80%50% at 5 yrs reducing by 10% every year

Within equities, it’s good to diversify across size and geographies. It’s good to consider hiring an adviser who can advise on the split and re-balance periodically. If you haven’t found anyone reliable, start with simplest – large cap

For equities, consider passive ETFs – such as

  • Equities – large cap – Nifty 50 ETF (eg NIFTYBEES)
  • Equities – mid/sml cap – Nifty Midcap 100 ETF (eg NETFMID150, M100, JUNIORBEES))
  • Equities – US – S&P 500, Nasdaq 100, Hang Seng etc(eg N100)

For fixed interest, consider direct bonds or ETFs

  • Bonds – Govt bonds (eg G-Secs or NETFLTGILT)
  • Fixed deposits
  • PPF
  • Sukanya Samriddhi Yojana
  • Tax free bonds

Is it ok to take education or student loans?

Generally, I don’t like taking on debt unless the ‘return on investment’ is likely to be higher. One could argue that education would lead to higher future income so it is ok to take loans. However, it’s better to do this for post-graduate courses when the child is clearer on their chosen career path.

How to plan for unforeseen situations should the main breadwinner die or become disabled?

Parents need to consider insurance as well as wealth planning through trusts. Within insurance, consider term insurance and income protection (also called salary continuance).

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