In Musings of a (Financially) Illiterate Father, the author notes that in 1999-2001, a 2-year MBA at IIM cost around Rs 3 lakhs. Fifteen years later, the same degree costs Rs 25 lakhs.
According to the National Sample Survey Office (NSSO), the average expenditure per student for technical/professional education rose from Rs 32,112 to Rs 62,841 between 2008 and 2014. Of course, this included costs of tuition, coaching, examination costs, costs of books, and other factors. Nevertheless, it is an abnormally inflated rate of 95.69%.
Whichever way you look at the data, one takeaway is clear: Education costs are inflating at an above-normal rate. Which means that parents need to invest to ensure that the returns on their child’s education fund outpaces inflation.
Don’t let the numbers scare you into inaction. Start right away, invest aggressively and regularly.
Here, the Morningstar Investment Management (MIM) team provides some guidelines to two readers who wrote in with queries.
For my daughter's higher education, I shall need a corpus of Rs 1.65 crores after a period of 18 years, considering inflation for education sector as 16%. This means I need to invest Rs 18,000/ month considering a return of 10%. I plan to allocate 60% (equity funds) and 40% to debt (Sukanya Samriddhi Yojana). What sort of a fund must I take considering this tenure? Should it be one or two funds?
- Shamik
Given a horizon of 18 years and your current asset allocation of 60% to Equity.
The equity allocation can be around 50% into large caps (across two funds) and 10% in mid-caps (one fund).
The fixed income allocation can be across accrual fixed income categories such as Banking and PSU Debt Funds, ST Income Funds and Corporate Bond Funds.
As your goal approaches (last 3 years), the allocation should shift around 10% each year out of equity into fixed income.
Investing Rs 18,000 per month, you may be able to reach only Rs 1.01 crore at the end of 18 years. However, if you can increase your SIP amount by 10% annually you may reach your goal comfortably (Rs 2 crore).
The corpus amount has been computed assuming equity market returns of 12% per annum and fixed income returns of 7% per annum.
I am a 35-year old guy with a 1-year old daughter. Please guide me on to start savings for my daughter's study education (primary, secondary and higher). I want a corpus of Rs 5 crores after 25 years. My current SIPs are Rs 13,000 into equity funds, including SBP Pharma. My NPS is Rs 11,000.
- Rohit
Assuming an aggressive risk profile given the long horizon of 25 years, you may have an asset allocation of 75% to Equity and 25% to Fixed Income.
The equity exposure should be about 50% into large caps, 15% in mid caps and 10% in small caps. The fixed income allocation of 25% can be across accrual fixed income categories such as Banking and PSU Funds, ST Income funds and Corporate Bond Funds.
As your goal approaches (last 3-4 years), the allocation should shift around 10% each year out of equity into fixed income.
We recommend moving out of sectoral funds since they involve a higher risk than other diversified funds.
Investing Rs 24,000 per month as per recommended asset allocation, you may be able to reach only Rs 3.20 crore at the end of 25 years. However, if you can increase your SIP amount by 10% annually you may reach your goal comfortably (Rs 7.8 crore).
The corpus amount has been computed assuming equity market returns of 12% per annum and fixed income returns of 7% per annum.
Points to note with regards to the above suggestions:
- When it comes to portfolio construction, the asset allocation-based approach should be followed as it is one of the key determinants of the portfolio’s performance, in terms of risk and return. A suitable asset allocation is typically based investment horizon and risk appetite. Generally, longer the investment horizon and higher the risk appetite, higher would be the allocation to equity.
- Given the prevailing market scenario with regards to debt paper downgrades and defaults, we find it advisable to invest in Banking and PSU debt funds, as these have a mandate to invest at least 80% corpus in banks and PSUs, which are safer bets from a credit perspective.
- We strong believe that one should consult a financial adviser before investing.
Post your query by accessing the Ask Morningstar tab. The Morningstar Investment Management team will endeavor to answer queries related to portfolio planning from our registered readers.
