As a parent, education is the best gift you can give your child. It is natural to want the very best for your child – the best schooling, best opportunities in life, etc. And as Indians, it is strongly ingrained in us that education is everything, and we want our kids to go to the top schools for their chosen fields.

But the biggest concern is the fast rise in cost of education, especially in India. If parents don’t plan early enough, they shell out a large portion of their savings to provide the best education. Hence, a financial plan to achieve this goal is very important. The earlier you start planning, the better it is.

Thus, Building a higher education corpus for your child is a long-term financial goal that requires careful planning and discipline. Here’s a step-by-step guide to help you effectively build a fund that’s enough to take your children to which institutes/universities that aspire to attend.

Step 1: Define your Goals

Estimate future education costs:

Analyse and find the current cost of higher education (both in India and abroad if you’re considering international education) and account for inflation, typically around 10% annually for education costs.

Determine the time horizon:

Calculate how many years you have until your child reaches college age, typically 18 years, to determine how much you need to save each year or month.

Step 2: Calculate the Target Corpus

Use future value calculation:

Based on the estimated costs and time frame, use a future value formula or a financial calculator to estimate the amount you’ll need by the time your child reaches college age.

Account for inflation:

Multiply the current cost by an inflation factor to get an accurate target corpus. For example, if the current cost is ₹15 lakhs, with an 10% inflation rate over 18 years period, the future cost might be around (hold your breath!) ₹83.4 lakhs.

Step 3: Assess your current Financial situation

Review existing investments:

Check if you have any investments earmarked for your child’s education.

Determine the shortfall:

Now, Compare your current savings to the estimated target corpus to find out how much more you need to save.

Step 4: Choose suitable investment options

Equity Mutual Funds:

For a time horizon of 10+ years, equity mutual funds are ideal due to their high potential returns (around 10-12% annually over the long term). Start a Systematic Investment Plan (SIP) in equity mutual funds for disciplined, long-term investment.

Children’s Mutual Funds:

Children’s Mutual Fund is an open-ended scheme designed primarily for child-specific needs like educational expenses, relocation, higher studies, healthcare, marriage, etc. These funds come with a 5-year mandatory lock-in period or until the child becomes an adult, whichever is earlier.

PPF (Public Provident Fund):

A safe investment option with a 15-year lock-in, suitable for conservative investors. PPF has a tax-free return and a current interest rate of around 7-8%.

Sukanya Samriddhi Yojana (for daughters):

This government scheme offers a high-interest rate with tax benefits and is designed specifically for girls’ education and marriage.

Debt Mutual Funds or Fixed Deposits:

Use these for shorter investment durations or if you want lower risk. Debt funds typically yield around 6-8%.

Step 5: Create an investment strategy based on your risk tolerance

Risk tolerance: Younger parents can consider more equity exposure for higher returns, while those closer to the goal might balance with safer debt investments.

Diversify: A combination of equity, debt, and government-backed schemes can provide a balanced portfolio that reduces risk while maximizing returns.

Step 6: Automate savings and review annually

Automate investments: Set up automatic SIPs or recurring deposits to ensure disciplined savings without manual intervention.

Review portfolio annually: Adjust your investments based on market conditions and your child’s changing needs. As you approach the goal, consider shifting from equity to safer debt options to preserve the corpus.

Step 7: Consider YOUR LIFE INSURANCE & Health Insurance for protection

Life insurance: Ensure you have your own life insurance plan to cover your child’s education costs in case of unforeseen circumstances.

Health insurance: Health insurance for all dependent members of your family, so that any medical emergency should not eat your other purpose-linked corpuses.

Step 8: Re-evaluate and adjust as necessary

Monitor costs and inflation: Higher education costs can fluctuate, so annually update your target corpus as needed.

Adjust investments: Based on the market or changes in your financial situation, adjust your investment plan to stay on track.

Step 9: Plan withdrawals strategically

Start withdrawing gradually: As your timeline approach near goal, gradually shift to safer investment options to protect the corpus from equity market volatility.

Consider tax implications: Be mindful of tax-efficient withdrawals to maximize the funds available for your child’s education.

By following proper planning, you can build a well-rounded education corpus that will help ensure that your child has the financial resources they need for their higher education goals.

An illustrative Example

Shreyo’s graduation.

They want to fund Shreyo’s graduation course, when she’s 18 years old, at one of the premier institutes in India. 

• IIIT Hyderabad B.Tech Tuition fee for the batch of 2025 is INR 4,50,000/- per annum = 18 Lakh for full B.Tech
• BITS Pilani B.Tech Tuition fee for the batch of 2025 is INR 2,59,500/- per semester = 20 Lakh for full B.Tech
• IIM Kozhikode Bachelor of Management Studies (BMS) Tuition fee INR 7,00,000t per year = 28 Lakh for full BMS

Shreyo’s Masters

This goal is after 22 years, when she turns 22. The current cost to pursue this goal is considered at Rs 25 lakh. 

• IIM Bangalore MBA Tuition fee = Rs. 26 Lakh
• IIT Bombay MBA Tuition fee = Rs. 16 Lakh
• XLRI Jamshedpur PGDM Human Resource Management Fees = Rs. 30.6 Lakhs
• S P Jain Institute of Management and Research (SPJIMR) MBA Fee = Rs. 22.50 Lakhs

What do the parents need to do to ensure Financial corpus for Shreyo’s Education?

1. To accomplish the financial goal, they need to invest Rs 20,000 per month in SIPs or Systematic Investment Plans of equity mutual funds, assuming they earn a compounding rate of return of 12% per annum.
2. The SIP Amount should be increased every year by 5%.
3. SIP should be started from the month the Child is born (Earlier the better).

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