Inflation in college education fees has been relentless. Choose an investment option that can help you sail past the cost bump
Parenthood is a mixed bag of emotions. While it adds joy, purpose and meaning to your life, it also comes with the added responsibilities and financial obligations. Though parents spend every day of their life drawing up a mental map for a robust future for their children, it takes some prudent investments to turn those dreams into reality.
If we talk about one of the most important one-time expenses that every parent saves up for, it’s education. However, the insatiable education inflation of 11-12% continues to make it costlier with every passing day. If an MBA college charges ₹30 lakh today, adding the 6% rise in college fee each year, the cost is likely to touch ₹1 crore 20 years from now.
So, it becomes imperative to punctuate your financial portfolio with the right investments to reap the best returns. If you are still on the fence about what avenues are worth your hard-earned savings, here are some factors to consider before making a decision.
When it comes to long-term investment, there isn’t a dearth of options. The fundamental decision is to choose what’s right for you and best-suited for your child’s needs. Conventionally, people preferred to lock their money into fixed deposits (FDs) for the long run. However, this might not be the best option now, since FD interest rates have shown a constant decline over the past seven years. As of now, FDs yield an average of a mere 5% returns which too are subject to taxation.
So, it’s better to look at options such as unit-linked investment plans (ULIP) and capital guarantee plans. These market-linked plans not only have potential to give you the upside on market returns, but also help you achieve your desired corpus. Even with the risk component, capital guarantee plans usually generate a tax-free return of 12-15%. These plans are a combination of ULIP and guaranteed-return plans, so they offer the best of both worlds in terms of risk and guaranteed return. What’s more — you get 100% of your premiums back after the completion of the policy term. This secures your money even in the event of economic downturn.
However, if you don’t have any appetite for risk, you can opt for guaranteed return plans that are suitable for both you and your child. These are investment-cum-savings plans that offer a fixed rate of return after a certain period, minus the risk of market volatility. Subject to policy terms, you can get up to 6-6.5% tax-free returns on these plans.
Life cover
Unfortunately, we live in a world riddled with uncertainties. Every parent wants a safe and secure future for their children even in their absence. The main reason why you should invest in a capital-guarantee plan or guaranteed-return plan is because they come with a life cover which many other financial instruments do not offer. The insurance element in these plans not only secures your child’s future, but also their present. These plans ensure that the family gets the life cover paid to meet immediate expenses in case of of the policy proposer’s death.
Most important, they also come with the in-built feature of waiver of premium. This means that after the death of the policy proposer, the future premiums are waived and paid by the insurance company so that the policy continues as usual. This feature is unique to these policies and it helps immensely with the education or marriage of your child even in your absence. The child also gets a regular income on a monthly basis that takes care of tuition fee and other expenses. Upon maturity, the child would receive the fund value as well.
Delay, pay more
It’s obvious that you must weigh your options carefully for an investment as crucial as this, but it’s important to remember that you lose out on returns for every day you delay. The key is to start as early as possible to attain a sizeable corpus. The longer your money is locked in, the better it will grow. Did you know you can start investing from the time your child turns three months of age? Options from companies in the market are available such that, with an investment of ₹10,000 every month for 20 years in their capital guarantee schemes, you could get a maturity amount of ₹1 crore. This could also include a life cover of ₹12 lakh.
Assuming quickening inflation, expenses for education will go through the roof decade after decade. If you invest early, you could opt for a longer period to lock your money in and enjoy even better gains.
(The writer is Head, Investments, Policybazaar.com)
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