I am 31 year old female working in software industry and earning 1 lakh per month and I have two kids of age 7 and 1 years old.I do sip of 17k and 22K in pli.I have a outstanding home loan of 20l which we decided to pay off next 3 years. Could you please suggest suitable corpus and investment amount per month for two kids for higher education in India

Ans: Planning for your children's future is a thoughtful and wise decision. Let’s dive deep into how you can achieve a suitable corpus for your children’s higher education, while also balancing your financial commitments.

Understanding Your Financial Landscape

You're 31 years old, working in the software industry, earning Rs 1 lakh per month. You have two kids aged 7 and 1, and you’re doing SIPs of Rs 17,000. Additionally, you're contributing Rs 22,000 in PLI. You also have an outstanding home loan of Rs 20 lakhs that you plan to pay off in the next 3 years. This scenario requires careful financial planning to meet your goals efficiently.

Setting Education Goals

Before jumping into numbers, let's identify the target corpus for your children's higher education. Education costs are rising rapidly. Assume your elder child will require funds in 11 years and your younger child in 17 years. Estimating current costs for higher education in India at Rs 20 lakhs (considering inflation), this might go up to approximately Rs 40-45 lakhs by the time your children are ready for college. Hence, you need to plan for a corpus of Rs 40-45 lakhs per child.

Investment Strategies

SIPs in Mutual Funds

Mutual funds are a robust vehicle for long-term investment. They offer the power of compounding, which is crucial for building a significant corpus over time. Here are the advantages:

Diversification: Reduces risk by spreading investments across various assets.
Professional Management: Managed by experts who make informed decisions.
Compounding: Reinvesting earnings to generate more income over time.
Flexibility: Easy to start, stop, or modify your SIPs as per your financial situation.
Equity Funds for Long-Term Growth

Considering the time horizon of over a decade for your children's education, equity funds can be a good fit. They have the potential to deliver higher returns compared to debt funds or fixed deposits, albeit with higher risk. Over long periods, the volatility in equity markets tends to even out, providing substantial growth.

Debt Funds for Stability

While equity funds can provide growth, it's wise to balance your portfolio with debt funds. They offer stability and reduce the overall risk. As your children approach college age, you can gradually shift more of your investments from equity to debt to protect against market volatility.

Systematic Investment Plan (SIP)

You're already investing Rs 17,000 per month in SIPs. To reach your goals, you might need to enhance your SIP contributions gradually. Here's a step-by-step plan:

Increase SIP Amount

If possible, increase your SIP contributions by 10-15% each year. This increment can significantly impact your corpus due to the power of compounding. For instance, starting with Rs 17,000 and increasing it yearly can help bridge the gap towards your goal.

Allocate Across Fund Categories

Allocate your SIPs across different types of funds to balance growth and risk:

Large-Cap Funds: For stability and moderate returns.
Mid-Cap Funds: For potentially higher returns with moderate risk.
Small-Cap Funds: For high returns with higher risk.
Flexi-Cap Funds: For diversification across market capitalizations.
Public Provident Fund (PPF)

PPF is a reliable option for long-term investments with tax benefits. It offers a fixed rate of return and the interest earned is tax-free. Since it has a 15-year lock-in period, it aligns well with your long-term goals. Consider opening a PPF account for each child. This can be a secure part of their education fund.

Insurance Policies and PLI

You’re contributing Rs 22,000 in PLI. Traditional insurance plans typically offer lower returns compared to mutual funds. Reevaluate your policies and see if they align with your goals. If they’re purely for investment purposes, it might be worth considering surrendering them and redirecting the funds into mutual funds for better returns.

Paying Off Your Home Loan

Paying off your home loan in the next 3 years is a prudent decision. It will free up funds that can be redirected towards investments for your children’s education. Ensure that you have a balance between paying off your loan and investing for future needs. Once the loan is repaid, you can significantly increase your SIP contributions.

Emergency Fund

Maintaining an emergency fund is crucial. Ensure you have at least 6-12 months of your expenses saved in a liquid form, such as a savings account or liquid mutual funds. This provides a cushion against unforeseen financial challenges and prevents you from dipping into your long-term investments.

Monitoring and Reviewing Your Portfolio

Regularly review and monitor your investment portfolio. Financial goals and market conditions change over time. Ensure your investments are aligned with your objectives. A Certified Financial Planner (CFP) can help you with periodic reviews and adjustments.

Creating a Detailed Investment Plan

Assess Monthly Savings Potential

After accounting for all expenses, including home loan EMI and current SIPs, calculate how much additional amount you can save monthly. For instance, post loan repayment, a significant portion of your income will be available for investments.

Increase SIP Gradually

With the additional savings, start a new SIP or increase existing ones. Given your target corpus for education, you might need to invest an additional Rs 20,000-25,000 monthly. This is an estimate; the actual amount will depend on returns, inflation, and other factors.

PPF for Long-Term Security

Open PPF accounts for each child and contribute the maximum limit annually if possible. This will provide a secure, tax-free corpus for their education.

Diversified Mutual Fund Portfolio

Split your monthly SIPs into different fund categories. For instance:

Large-Cap Funds: 40% for stability.
Mid-Cap Funds: 30% for growth.
Small-Cap Funds: 20% for high growth.
Flexi-Cap Funds: 10% for diversification.
Regular Review and Adjustments

Set a yearly review of your portfolio. Assess the performance, rebalance if necessary, and ensure it aligns with your goals. This proactive approach helps in staying on track and making timely adjustments.

Empowering Your Financial Journey

Your dedication to securing your children’s future is commendable. Balancing current expenses, loan repayments, and long-term investments can be challenging. However, with a disciplined approach and a well-thought-out plan, you can achieve your goals. Remember, the key lies in starting early, being consistent, and regularly reviewing your progress.

Final Insights

Planning for your children’s higher education is a significant responsibility. By leveraging mutual funds, particularly equity funds for long-term growth, and balancing with debt funds for stability, you can build a substantial corpus. PPF provides a secure and tax-efficient option to supplement your goals.

Reviewing and adjusting your investments periodically is crucial to stay on track. With your current financial commitments and income, a disciplined investment strategy will help you achieve your objectives. Continue to be proactive, increase your SIPs gradually, and maintain a diversified portfolio.

Your children’s future is in capable hands with your thoughtful planning and dedication.

Best Regards,

K. Ramalingam, MBA, CFP

Chief Financial Planner

www.holisticinvestment.in