Investment for child education – an innovative way

One of the benefits of running a Facebook group or writing a blog is the sheer number of people you get to interact with. Every person you get to know has an unique financial situation and I find it fascinating that there is a lot to learn from every encounter. As some of you know I am currently in Kuwait on a Consulting assignment. Last Friday I met one of the regular readers of my blog, who is in Kuwait for past 6 years. We have interacted online and I had advised him on some of his investments, so it was a great opportunity to actually meet up face to face.

Jay has been working in Kuwait for a UNDP sponsored project for the last 6 years. His family consists of his wife, who works in a bank and a 5 year old daughter. He has been investing in Real Estate both for his own apartment in Chennai as well as having some plots of land. Over the years he has had some investments in debt but really started investing in both MF and some stocks in this year. He had reached out to me about 2 months back saying that he was able to invest 2 lacs every month for a period of 1 year with the objective of creating a corpus for his daughter’s college education. I had suggested some funds to him but had wondered as to why he wanted to concentrate his investments for the goal in the span of 1 year. When I met him it was one of the things I was curious to know about.

I was able to understand the situation much better during our face to  face discussion. Jay feels that he may want to continue in Kuwait for the next 2-3 years and then move back to India. As he is relatively young, he has time for his goals like retirement and daughter’s marriage. As his home under construction is also paid for largely, he sees it logical to now concentrate all his investments towards the goal of his daughter’s college education. He wanted to understand from me if he had a MF portfolio with 2 lac SIP for the next 12 months, will it be enough for his daughter’s college education?

I worked out the following plan for him:-

  • Assuming his daughter’s education has a present cost of 15 lacs, in 13 years time it will be equal to 92.29 lacs, if we assume an educational inflation rate of 15 %.
  • Let us assume he invests 24 lacs over one year and take a conservative return of 12 %. In 12 years this amount will grow to 93.5 lacs, which will be adequate to meet the college expenses of his daughter.
  • Additionally, he should have some debt instruments to ensure that he does not redeem his equity portfolio at the wrong time. As long as he has cover for about 2 years of his daughter’s college expenses he will be fine.

What are the learning we get from this particular situation? 

  1. Investment is a function of surplus that you have. If you are in a high paid job today, maximize your investments. You never know what might happen tomorrow.
  2. Assuming that our markets are likely to grow in the long run, it will always be better to get your investments done quickly rather than through prolonged SIP. The constraint normally is available surplus, which Jay has.
  3. I am a great believer in having 3 portfolios of Debt, MF and Stocks, so that there is no need to have separate portfolios for individual goals. However, if you are more comfortable with a one to one mapping of portfolios to your goals then a logical way will be to plan for the closest goal first and then for the others.
  4. For example, even if Jay had only 1 lac surplus per month, it would still be a good idea for him to imvest for his daughter’s education over 24 months before looking at the other goals.
  5. Fundamentally though, as you would have understood by now, the distinction is purely academic as money is money, and it does not matter how many buckets you artificially create for it.

In my last corporate job as the CEO of Goldstone Tecnologies I had followed a similar method of aggressively investing the maximum possible amount in debt instruments as I wanted to create a passive income stream. That is another story for some other post in the future.

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One thought on “Investment for child education – an innovative way

  1. Hi sir,
    good article.
    I got one idea and i would like to know your opinion.

    Lets suppose if my son engineering education cost estimated in today’s cost as 25 lacs and this entire amount do not spend in first year alone. For suppose if we put 30 lacs in debt fund which will give 9-10% return i.e. 3 lacs which we can utilise for yearly payment. once 4 year education is over, we can utilise this amount which is there in debt we can fuel for retirement corpus as well. so instead of saving for education and retirement separately, we can invest entire SIP amount in one goal itself and we can met both goals safely one after the other.

    do you think it is good idea?

    Like

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