6 Reasons to Invest Early in a Child Education Plan

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 It is not uncommon to see parents fretting over education cost of their child. And their worries and fears are not really unfounded after all education forms the major portion of expense on a child’s upbringing. The rising cost of education is gripping all standards, right from elementary education to higher studies. But the good news is that more and more people are planning and investing to meet the cost of education of their children in future.

In a report titled “The Value of Education: Learning for Life” based on a global survey by HSBC Retail Banking and Wealth Management, it was found that 51% of Indian parents wanted their child to be successful in their career. Around 88% think that a master’s degree or higher is necessary.These figures are evidence that parents are being proactive and carefully planning for a secure amount that can support the child’s education in leading schools and colleges in future.

Now, while the cost of education is rising, there are various child education plans available in the market to reduce your financial burden.

What is a Child Education Plan?

A child education plan help you to secure your child’s future at the key educational milestones of his life. You can invest in this plan in small amounts every year. When your child is ready to go to college or for higher studies, you would have a huge corpus to meet his educational needs.

A child education plan also comes with a death benefit. That is, it protects your child against the unfortunate event of your death. Your child will continue to get the payouts from the plan till the term of the policy or even after you are not around.

So, its advisable to invest in a child education plan as early as possible. Sooner you invest, more timely benefits you can reap for your child’s education.

Here are six reasons why planning for your child’s education cost at an early stage might be the best decision you ever made.

  1. Life is Uncertain

Though we would want a life that runs according to our plans but the fact is that it is unpredictable and in some cases unfortunate. For parents, this should be one driving factor to secure their child’s future which is protected irrespective of their presence. These events can strike anytime and out of nowhere, worst at any age. One also should take into account that after such ill-fated eventualities, the burden of a child falls on the grandparents or other family members, who may have limited financial resources to catering the child’s education needs.

  1. Limited Financial Commitments

When you are young, most of your financial commitments are limited, predictable and can be forecasted easily. It is also easier to cut down on monthly expenses by controlling some factors. However, as you progress towards a higher age, there would be EMIs, children, car, house and many such expenses that might not be avoidable. This is why starting young with child education plan makes a big sense. Especially in case of couples, where both partners are working, keeping aside certain amount to be invested in a child education plan is a good idea.

  1. Inculcates a Habit of Saving

Since a child education plan is a long term investment, it helps you to invest systematically with discipline and commitment. You invest periodically, which reduces your financial burden and encourages you to save a part of your income towards your child’s future.

  1. Risk Mitigating Factor

A child education plan is a long term investment and a market-linked investment. When you invest early on for a period of more than 10 years, you save erosion of your investment due to market ups and downs. If you start late and your child is about to get to college in next 4-5 years then the investment might suffer in case markets turn for the worst.

  1. Compounding Returns

Compounding simply means earning returns on returns made. In long term plans such as a child education plan, the dividend is added to the original investment thereby increasing the size of fund. The entire amount is again invested, so your earnings are based on a larger fund therefore the net gain is higher. Therefore longer the term of your investment, more the returns. Following example clarifies this concept:

 

Components Deposit/ Plan A

(Compounding quarterly)

Deposit/ Plan B

(No Compounding)

Principle (in Rs) 1000 1000
Interest/ Returns 10% 10%
Month of Investment January January
Return earned by March end (in Rs.) for 3 months 25 25
Returns by June End 25.625 (On a fund value of 1000+25) 25 (on a fund value of 1000)
Total returns for January to June (In Rs) 50.625 50
Total Returns over 10 months (Rs) 1685 1000
Total Fund Value after 10 years (Rs) 2685 2000

It is quite clear from the above table that compounding can lead to high comparative returns from a simple non-compunding investment.

  1. Tax Benefits

Child education plans give you tax benefits since the insurance component is also involved. The investment up to Rs. 1,50,000 are allowed as a deduction from the taxable income each year under Section 80C. Similarly, all capital gains and maturity benefits are also exempt under Section 10D(D). For example, ICICI Pru Smart Kid Plan gives you tax benefits on premiums paid and benefits received.

For all practical purposes, planning and investing in your child’s education at an early age carries a lot of benefit.