Becoming a parent is a beautiful feeling that not only brings a great deal of joy and satisfaction to the family but also adds a lot of responsibilities to the shoulders of parents. Generally, parents incur Rs. 60 to 70 lakhs for raising a child in their initial 20-22 years. This includes various costs such as food, clothing, electronics, education, etc. But one segment that requires a huge amount of expenditure is education. Education plays a crucial role in a child’s growth and development. And with rising inflation, it will cost more and more in the future. When you realize you must spend a lot on your child’s education in the future, don’t you think you should be prepared for this situation?
The best way to face this situation is to start saving and investing for your child’s education in a systematic manner using a goal-based approach. In a goal-based approach to investing, you make a dedicated plan for a specific goal and invest as per the risk appetite and time horizon to achieve that goal.
Look at the step-by-step process for goal-based investment:
Step 1: Identify and categorize the expenses into short-term, medium-term, and long-term goals
The first step of planning for your child’s education funding is to identify and bifurcate the expenses into short-term, medium-term, and long-term goals. You have to bifurcate the expenses into these categories based on the time you have in your hand.
- Short-term goals include expenses expected to be incurred within a year.
- Expenses that would be incurred over a three-to-five-year timeline fall under the medium-term goals. So, for example, if you are planning when the child is born, then play-school fees would be categorized as a medium-term goal.
- Long-term goals are expenses that are expected to be incurred after five years. This would include tuition fees for higher education, college fees, and fees for professional courses, etc.
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Step 2: Make a dedicated plan for each type of goal
Once you bifurcate the expenses into short-term, medium-term, and long-term goals, make a dedicated plan for each goal and start investing accordingly. How can you do that?
Short-term goals: As discussed earlier, short-term goals include expenses that are expected to be incurred within a year. So, you will not be able to take high risks while investing for short-term goals. Hence, it would help if you targeted instruments with high liquidity and low risk. For such short-term goals, debt funds are the best choice because they are less volatile, provide high liquidity, and give higher returns than regular saving account deposits.
Medium-term goals: You have three to five years in your hand for medium-term goals. So, you can take more risks compared to short-term goals. In such a case, you can consider large-cap equity. Large-cap mutual funds or hybrid mutual funds can be a good option for medium-term investing because they are not as risky as small-cap or sectoral funds, and yet they provide a potential for growth.
Long-term goals: While planning for long-term goals, the advantage you have is that the time is in your favor. Due to time availability, you can take high risks while planning for long-term goals. Hence, you can consider mid-cap or small-cap funds while investing for long-term goals. Even an aggressive investor can consider sectoral or thematic funds as well. Although they are risky, they have an excellent long-term potential for growth. So, by investing in mid-cap or small-cap funds for your long-term goals, you can create a good amount of corpus to fund your child’s education.
Step 3: Rebalancing the funds
Planning for your child’s education is not a one-time exercise of investing and forgetting about it. You need to monitor the investments that you have made. As time progresses and you reach closer to your goal, you have to rebalance your investments. This is because your risk appetite changes as you reach closer to the goal. For example, initially, you invested in high-risk equity funds for long-term goals. But as time progresses, you need to move out of high-risk funds and enter comparatively lower-risk funds such as large-cap funds or hybrid funds. And further, when the expenses are due in one year, you should park your money in debt funds. By rebalancing your investments, you reduce the risk as you come closer to your goal.
If you look at the steps mentioned above, you will recognize that the strategy for both short-term and long-term goals differs. In the short term, capital protection is essential because you have to make a payment that cannot be postponed, and hence you should try to avoid taking a high risk. On the other hand, you have enough time to make payments in case of long-term goals. So, even if something goes wrong, you have the time to recover, so you can take a higher risk. Therefore, investing in high-risk equity allows you to grow your capital by taking advantage of time.
As a parent, you have a lot of responsibilities toward your child, but one of the most important ones is to make financial arrangements for your child’s education. To fulfill this responsibility, you should consider goal-based investing, which would reduce the burden on your shoulders and make your life easier.