Go for equity in the initial years, move to debt and other safer instruments later

For her four-year-old daughter's higher education, Priya Nair is investing through systematic investment plans (SIPs) in two equity-diversified funds. Her plan: To create a corpus in excess of Rs. 20 lakh over the next 15 years. However, merely creating a corpus is not enough. In the later years, there will be an annual, even quarterly, requirement of funds. This implies the need for regular cash flows. Investments, therefore, need to be planned so as to meet these financial demands.

As certified financial planner Gaurav Mashruwala says, "As a thumb rule, for the maximum growth, investments for goals which are more than 10-15 years away should be made in equities. Two-three years prior to the goal, the corpus should be shifted to debt instruments." Nair's goal of funding her daughter's higher education is almost 15 years away. Assuming a return of 12 per cent, her monthly investment of Rs. 10,000 in equity mutual funds over a period of 10 years will generate a corpus of about Rs. 23 lakh. However, the same could be much more if one starts earmarking higher amounts at later stages.

These adjustments may also have to be made midway, in tune with the rising cost of education. For instance, basic college education in India can cost anywhere between Rs. 2-10 lakh today. The number could double or even treble over the next 15 years. That means Nair would require Rs. 20-30 lakh just for basic college education. Higher education would cost even more. She needs to account for that as well.

Nair should transfer the part of the corpus required for her daughter's college education in debt instruments twothree years in advance. Also, based on requirements, investments can be divided amid instruments. Fixed deposits (FDs), monthly income plans and debt mutual funds can be considered to earn regular returns. Some part of the corpus should be left to equities and transferred later. Nair could either opt for deposits maturing just before her daughter begins college or go for multiple deposits, each maturing just before the beginning of a new academic year. If she opts for the former, she will have to keep shifting the funds into deposits of shorter tenures at regular intervals.

"A more liquid option would be income funds. However, unlike FDs, their returns fluctuate depending on the prevailing interest rates," says Malhar Majumder, a certified financial planner. Another option often considered for regular returns is the post office monthly income scheme (MIS). One can invest amaximum of Rs. 9lakh in a joint account.

But, there is a lock-in of six years, thereby making them quite illiquid. Hybrid funds, which have both equities and debt, could be a good option. Whether to go for an high-equity option or a low-equity one should be based on the risk profile of the investor. Despite such meticulous planning, be prepared for a shortfall in the corpus. In such a scenario, an education loan can be required. Also, avoid a personal loan unless it is a small amount. Even as a parent, servicing an education loan is a better option as interest payment gets tax benefits under section 80E.

WHEN PLANNING FOR YOUR CHILD'S EDUCATION...

Start investing in equity early to enjoy the benefits of compounded returns

Switch funds to safer instruments on the debt side, two-three years prior to requirement

Instruments like FDs, MIPs and debt mutual funds can be considered

Avoid illiquid instruments like Post Office Monthly Income Schemes

In case of a shortfall in corpus, take an education loan