Ideally, investors should start contributing towards their children’s education from the time the kid is born. However, many investors realize the importance of financial planning for their children education late in life.
As advisors, it becomes a challenge to plan the right mix of assets, especially if the time-frame is shorter.
Here are a few suggestions from a few leading advisors that could help you plan for the education of your clients education.
Investor having a child between 5 and 10 years
At this stage, the investor has a long time horizon for investing. Nisreen Mamaji of Money Works says that at this stage advisors should encourage their clients to have 100% equity exposure with a diversified portfolio. “I recommend such clients to invest at least 30 to 35% of the corpus in small and mid cap funds considering the long time horizon. Since they will need the money after 10-13 years, advisors can suggest equity instruments,” she says.
Investor with a 10 -15 year old child
Advisors doing asset allocation for such a client are looking at an investment horizon of 5-8 years. Chennai-based D Muthukrishnan of Wisewealth Advisors says that advisors should suggest balanced funds to these clients. “Though it is better to invest through equity for long term goals the paradox is, that with the reduced time span equity becomes a risky option. Ideally, I ask clients to park their funds in balanced funds with no more than 60-40 exposure to equity,” he says.
Muthukrishnan adds that advisors must encourage their clients to cut out all unnecessary expenses. “Advisors must ask investors to save more if they hope to make up for the time lost. They must explain to their clients that unlike investing right from the child’s birth, in a 7 or 8 year horizon, the only way to amass sufficient money for further education is by doubling their savings. Advisors could also help their clients identify areas where they are spending money unnecessarily and shift this amount towards savings,” he says.
Investor with an over 15 year old child
Advisors with such clients need to make it clear to their clients that it is impossible to grow their investment significantly in such a short time. The only way to remedy the situation is by increasing the investment amount periodically, says Amol Joshi of Plan Rupee. He says, “Since the time horizon is not more than 3-4 years, the maximum equity exposure an advisor can suggest is up to 30%. The best funds to look at this stage would be either balanced advantage funds or equity savings funds. If the client is slightly more aggressive, advisors can increase the equity exposure to 40%,” he says
Advisors who have such clients must encourage them to save more than what they normally would. Setting their sights on the inflated costs of child education and comparing this amount with the savings they have in hand, could act as a motivator for such clients.