Education costs have gone through the roof. Now planning for your child’s future is not just a choice but a necessity. Consider these samples. An engineering or medical degree in a medical college will set you back by at least Rs.25 lakhs over five years. A 2 year MBA would approximately cost you an equal amount. That is if you are educating them in India. If you plan to send your daughter abroad for under graduation and post graduation, then you can multiply these costs by a factor of 5X. Obviously, there are various investment options in front of you to reach these goals but the condition is that you start early and invest in a systematic manner. Let us look at gold as an asset class to plan your child’s future and then look at other equally interesting options that can create serious wealth over the long run to pay for your child’s education.
Investing in gold for child’s future – How good is that?
There are different ways to invest in gold. You can invest in physical gold like in jewellery, gold bars, gold coins etc. Alternatively you can also invest in non-physical gold like in the case of RBI gold bonds, gold funds, gold ETFs etc. These help you participate in the price of gold without the hassles of holding physical gold. The question is whether gold is a good stand alone asset class to plan for your child’s future?
While gold has done extremely well in the last one year in the midst of economic and political turmoil, it has its limitations as an asset class. For example, gold was at $900/oz in 1979. In 2020 gold is at $1700/oz. That is an annualized return of nearly 1.6%; not even sufficient to cover the inflation rate. Even if you consider the period from 1979 to 2011, the next peak, the annualized returns are just 2.2% annualized. That is still a low lower than inflation. The reason gold is important is that it can be a good hedge against market turmoil. For example, in the current scenario when stocks have corrected 35% from the peak levels, gold prices have actually appreciated. That is why an allocation of 10-15% in gold is advisable and the same can be tweaked based on gold price levels. Holding gold beyond that is not a great idea. The next question is how to hold gold?
The best way is via gold ETFs. They are market linked, easy to hold in demat and represents price real time. Gold ETFs are available on tap, unlike gold bonds that are only issued at intervals from the banking window. The reason why you should not hold gold in physical form is because jewellers sell it at premium, the cost of keeping it in a bank locker is very high, the quality could be compromised, and you could end up selling it for less than its actual market value. Assuming that only 10-15% should be in gold, what asset class will drive the planning for your child’s education?
The answer lies in equity mutual funds
It is ideal to start investing in equity mutual funds when your child is young so you get around 15 solid years to plan her education. This allows you to bear shocks such as crashes and volatility of the stock market. Equity mutual funds bring the benefits of wealth creation, diversification and expert management. They may be volatile in the short term but in the long term they tend to be the best wealth creators. For funding your child’s education, this can be your best bit. Above all, it is also tax efficient. You can create an equity mutual fund portfolio exclusively for your child’s education. This can be done by opening an account for minors and going for Systematic Investment Plans (SIPs) in aggressive instruments like equity mutual funds, when your child is 4 or 5 years old. Even if it compound s at 13-14% on an average, your child’s future is taken care of.
Do debt funds fit into your child’s future plan?
Yes, they do for two reasons. Firstly, debt funds provide stability and certainty of cash flows and some part of your corpus (at least 30%) should be in debt funds. Secondly, you must shift your equity funds into debt funds at least 2 years before your milestone year so that there are no nasty surprises in the last minute. Debt mutual funds, after all, invest in fixed income securities like treasury bills, government securities and corporate bonds.
How do you insure your child’s future?
Firstly, insurance is mandatory. You need to ensure that the child does not have to suffer if something was to befall you. The answer is to take an insurance policy. ULIPs can be fairly inefficient as the loading is too high. Money-back policies are good but they confuse between investments and insurance. The best choice is to go for term policies as they cover risk at a lot cost.