Educating Your Kids Is No Child’s Play

From nursery to college, you need over Rs 21 lakh to just sponsor your child's education in the metros. This requires proper investment planning.

"It's a girl," says the nurse to the couple. The couple has been waiting for this moment for long and is elated! Be it a boy or a girl, all parents want to give the best to their child. The addition of a member to the family brings joy and cheer to everyone, but there are additional responsibilities too. One of them is giving the best education to your child, which requires a lot of money. From playschools to post-graduation, education costs are rising. Our estimates indicate that on an average, it can cost you Rs 21 lakh (at today's prices) to educate a single child from school to college. This includes expenditure on school fees, coaching classes, books, stationery and so on. If you have to include post-graduation studies as well (MBA, for instance), the cost may go up to Rs 98 lakh.

How long is the child dependent on you?

Before drawing up a financial plan, you have to know how long the child will be dependent on you? Hence, you have to start planning for your child from around six months before the baby is born to his/her estimated age of marriage. In some cases, it could be till the child continues to study.
Ideally, parents should have a buffer to take care of over-runs and contingencies. For example, Nitin Vijan's budget for his daughter, Vedika's, education looks like this: Rs 55,000 a year up to Vedika's junior college; Rs 3 lakh for her fouryear engineering course and Rs 20 lakh if she plans to pursue her masters in science or an MBA.

Expenditure graph

Estimates show that the expenses are higher (not necessarily on education) when the child is in the age bracket of 1-5 years. Subsequently, costs tend to lower once the child reaches the age of five years. Again, the expenditure mounts when the child touches 15 years of age. Parents spend in the range of several thousands up to a lakh just on coaching classes and tuition.
Says chartered wealth manager and certified financial planner Kartik Jhaveri, "Parents want to give the best to their child to prepare him/her for the board exams so that s/he can come out with flying colours. They do the same, but on an even larger scale for the 12th standard. In this case, it's more crucial if the parent plans to sponsor the child's professional course."

Graduating from college

Here, the expenses depend upon what course the child plans to pursue. Professional degrees such as engineering or medical are more expensive than regular graduation courses. Here too, there is another variant. If the child is studying in India, expenses may be under control. But if the child plans to pursue his/her education abroad, expenses can go through the roof. Finance options are available to fund overseas education.

Start early

It pays to start planning early to sponsor the education of your child. You can start with a monthly saving of Rs 8,000-10,000 which can go to your child's kitty. You should work towards a corpus of Rs 10 lakh and upwards. A Rs 10-lakh corpus will just take care of your child if s/he plans to do regular graduation. You have to keep aside this money and keep withdrawing from the returns generated from this capital.

Child plans may not be the best investments

Don't get tricked by an insurance broker who says high premiums (of a child plan) will fetch you the best returns for your child. You have to read the fine print to see if it's worth the money. In reality, it may be a high-cost product, yielding peanut returns, Mr Jhaveri adds.

Stick to simple investments

Diversified equity funds can do the needful. One of the advantages of these funds is that they give you the flexibility to withdraw whenever you want. Moreover, they're not time-bound, nor do they have a predefined investment where the money can't be touched till your child turns 18, says another wealth advisor under conditions of anonymity. You can exit from the investment if you feel you've made a wrong investment decision. Also, the returns are largely tax-free.

It's time to take floating interest loans in India

A cumulative 4% interest rate hike for home loans in the past two years has caught many floating rate borrowers on the wrong foot. Yet, today, floaters seem the best option for new home loan takers, all thanks to near-peaking of rates. Any further fall in interest rates will also directly benefit them.

The news that HDFC has cut home loan rates by 0.5% on all fresh loans up till October 31 is all over the newspapers and TV channels. But existing customers are not affected by this and prime lending rate (PLR) has also been maintained at the original 14%. However, this report has cheered up new home loan takers. Home loan rates have seen several highs and lows in the past few years. Rates halved to 7% in '03 from 14% in '00. Then the floating rate curve began to go up and settled at 10-12% in January '07. That's almost a hike of 3-5% in the past four years. Now, what you need to know is whether the rising trend of interest rates will continue? Also, if you plan to go in for a home loan now, should you float or fix yourself at a particular rate? Industry experts say even today, a floating rate is a safe option for borrowers due to several reasons:

Interest rates may not rise much further

Most industry experts are of the view that the rates are likely to stabilize at these levels. A senior public sector banker explains any further rate hike will pinch customers' pockets even harder. "This, in fact, is likely to hurt the economy as a whole, since even the corporate sector will come under pressure. So, we do not foresee any further rate hikes. However, we will get an accurate idea only by November. So far, the credit pick-up has been low, which traditionally tends to peak only in the festive season beginning November. But there have been concerns about rising inflation and high liquidity, which may prompt the Reserve Bank of India (RBI) to hike the cash reserve ratio (CRR), which may impact the rates. Even in that case, the hike in rates will be very marginal, in the range of 0.25-0.5%," the banker adds.

True fixed rate comes at a high premium

After being impacted by the volatility of home loan rates, customers now feel it's best to opt for a fixed rate product. The obvious explanation being that although a partly-fixed rate typically is 1.5-2% higher than the floating rate, at least borrowers are spared from frequent rate hikes. But that's just one side of the coin. Says home loan expert and apnaloan.com CEO Harsh Roongta, "As of now, it makes economic sense to go for a transparent floating rate. The gap between a pure fixed rate and a floating rate is almost 2.25%. It's too high a premium to be borne by a customer." Mr Roongta explains that unless floating rates touch 13-13.25%, borrowers need not worry and lock in at a fixed rate.

Your fixed rate isn't really that

In India, fixed is never fixed. So, it may just happen that your floating rate of interest on the home loan does not go down after an overall fall in interest rates.

Here, it is essential to explain the difference between a fixed rate and a true fixed rate.

A fixed rate which is linked to the money market condition has a reset clause. This implies that the bank or housing finance company (HFC) can tinker with the interest rate in extreme market conditions. State Bank of India (SBI) introduced the reset clause in August '05 and now, the period is two years. Other public sector banks like Canara Bank and Corporation Bank have a reset clause period of five years. To that extent, if there is a rate change during the period when the reset clause does not come into effect, the rates remain unchanged even if the floating rate interest rates go up.
On the other hand, in case of a true fixed rate product, the bank or HFC does not stand any chance to tweak the rate.
Few leading housing finance companies like HDFC offer the true fixed product. This product charges a higher interest rate than the partially fixed product.
All said and done, there is no single answer to the question: should home loan takers go in for a fixed or floating interest rate?
The answer changes from time to time. It would have been ideal if you fixed your rate at 7% in '03. That's because it is unlikely that interest rates will dip to those levels any time now.
Now, you should go in for a floating rate as interest rates have almost peaked. So, there is no reason for you to lock in yourself at a higher interest rate.
Also remember, your job is not over once you start repaying your home loan. You should ideally review your rates every six months.
That will help you to figure out an effective repayment plan for your home loan.