Are You Saving for Your Child’s Education in the Right Way?

Saving the right amount of money for your child’s education is always difficult. Even more difficult is the implementation and tracking of investments.

There are several common problems guardians or parents face while investing their hard earned money. First, they plan and set aside the amount on an ad hoc basis. We still believe that a person don’t factor in inflation and therefore project a lower amount for educational purposes.

Secondly, it is not really easy to choose an investment vehicle, although the main options available are mutual funds(SIP Recommended), children’s plans from insurance companies, and the Sukunya Samraddhi Yojana (SSY) scheme(A great initiative by government).

The problem that most investors face when choosing an instrument is the risk of the instrument. Plans for children and SSY are low risk but also come with their own challenges and clause.

Children’s plans usually have not generated income commensurate with education inflation (which is only 10 to 15% per year), and also lack coverage for the child’s life (which is not really required though).

With Sukunya Samraddhi Yojana , only 50 percent of the accumulated money can be withdrawn at the age of eighteen. Therefore, many parents or guardians have started investing in mutual funds through different SIPs.

Thirdly, the operational procedure that is involved in investing can be a little cumbersome. Either parents make investments on their own behalf, which will be used for the education of the child, or deposit funds into the account of their ward for investment.

The crucial question that comes up is that people start out by putting a certain investment in a child’s education, but somewhere they fail to stick to that investment. Another question is whether investors will be able to cope with rising inflation through spending on education.

Just like the NPS (National Pension Scheme) for retirement, we need certain kind of instruments delineated for education spending, such as a college savings fund for example. This may be very similar to the 529 plans that is available in the US.

The 529 Plan is an investment program which helps you save for education expenses and provides tax-free withdrawals for qualified college education expenses. Allowed expenses include tuition, books, equipment, and food expenditure.

Majority of funds offer various types of investment plans, that also include age-based portfolios, which automatically allocate capital and debt based on the child’s age.

The benefits of a college savings fund are as follows:

• Firstly, it gives parents and guardians the opportunity to save on their children education in one tool.
• Secondly, investors also do not need to think about how much to allocate to debt or equity, as it is automatically done by the funds
• Thirdly, as its an automated investment scheme, it ensures that the specified amount is invested in a well planned manner.
• Fourth, the parent and guardians also has full control over the account.
• Fifth, any of your close relatives can also make gift contributions to the account. However it is subject to certain restrictions.

Of course, like any NPS, such accounts will also be partially inflexible, and rightly so. For instance, withdrawals are allowed for non-educational purposes too or early withdrawals is also allowed. Hence, it becomes easy for parents to use those savings for other purposes, just as PF savings are used to finance house purchases.

In India, a college savings fund can easily be modeled after the NPS, which is very low cost, and has many pension fund managers, and gives a wide range of investment plans.

The government may also consider providing some tax incentives on withdrawals to encourage savings in these plans. Investors should be aware that. However, being market-linked, these funds cannot be considered as risk-free or low-risk.

Targeted investment solutions, such as college savings funds, will make it easier for investors to make decisions and invest.