Why the child education goal deserves early planning

CNBC-TV18 / Sonia Shenoy:

Harsh Gahlaut, you manage, I think, 19,000 retail clients across 1,600 cities. I'm sure children's education is a big financial goal for your clients.

What is the typical fee that one has to shell out today for education in India? And if you talk about 15 years later, how much will that escalate to given inflation?

Harsh Gahlaut:

Thanks. So there are, I think, two aspects to this fact.

When you talk about it, I know a certain small percentage of people send their children abroad, but a majority of people will get their studies for the children done in India.

In that case, there are two aspects to it.

One, education in the country itself is changing, with a lot more new private institutions coming up, a lot of new colleges coming up, and they're not cheap either.

Typically, if I was to take an example today, even somebody doing an engineering course, approximately about two and a half lakh rupees a year is what a person pays, which comes to about 10 lakh rupees for the entire course.

But once again, the problem here is the cost of inflation.

If my kid was really small and five years old, and I was planning for 15 years and I put double-digit inflation into the maths, then this number goes up from 10 lakh to 54 lakh rupees.

And that is what you have to be careful about.

As education changes, courses will get more and more specialised.

Unlike the Western world, when people are planning for their finances, I think what we have seen with all our clients is that people really prioritise children's education.

We take that very seriously in the country. That's something which people are very focused upon, and almost 84% of our clients above a certain age group definitely have children's education as a goal for their children.

CNBC-TV18 / Sonia Shenoy:

So you're saying if I want to educate my child in India today, on average it's about two and a half to three lakh per year, but that will of course be much more when my child grows up after about 10–15 years.

35% of Indians are investing in bank deposits while only 6% of Indians are investing in mutual funds. Harsh Gahlaut, come in on that.

What is the reason for that? And if you have to educate your child abroad today, do you think equities are the only route to go, the only way you can properly beat inflation? And if yes, what are the products I need to look at?

Harsh Gahlaut:

I would think a little differently on this.

I think the reason why we have fewer percentage of people investing in equities is because there's a certain amount of fear that my money will be at risk and all of that.

Similarly, you have people trading short-term, and over there the greed factor takes over.

Where I would vary in terms of my thought process is that taking informed risk is very, very important.

In this case, you have to go beyond your fear.

I don't feel that for such long-term goals which are more than 5, 10 or 15 years away, investing in insurance products, FD or PPF will really work in your favour.

We must remember that we're talking about double-digit inflation. That means you have to beat double-digit inflation.

If you talk about endowment plans, PPF and FDs, on average 5.5%, 6.5% or 7% is what you would get. You would still not be able to achieve enough at an aggressive rate.

So taking informed risk becomes very, very critical.

Especially if your goal is 10–15 years away, you have to allocate funds towards equity.

Of course, you can simplify all of that. You can stagger all that money. You can also use this time to create a purpose by investing on a monthly basis, which drastically reduces your risk.

I think the key over here is to have a very clear-cut goal, so that takes away that fear. Take informed decisions.

If I may use an analogy, a long-term goal is like looking for a long-term relationship.

You have to have the right expectations. You have to commit to it. You have to communicate with somebody who can guide you and give you expertise to stay invested.

That is the only way you can compound at a higher rate than inflation and meet your goal.

In terms of expectations, you can't really expect that everything is going to be wonderful. There will be tough times; there will be good times.

When you're committed, you understand what you're getting into, you know what you want, and then you're willing to stick it out.

That is what I mean by expectations.

CNBC-TV18 / Sonia Shenoy:

Very quickly, if you can tell us how much should we allocate towards large caps, how much towards midcaps and small caps? What should the allocation be basically for your child?

Harsh Gahlaut:

I strongly believe that the risk that you should take should not be on your individual personality, but should be on the time horizon of the goal.

To a large extent, where you put this money will really depend on how far ahead you're planning for this goal.

If your goal is less than five years away, really I think the entire asset class changes.

But my assumption is five years and more.

If the goal is five to seven years away, you would probably want to take slightly lesser risk. You'll be okay with slightly lower returns, but you would probably have an index fund, a balanced fund and maybe a flexi-cap fund.

If your time horizon is between seven to ten years, you would increase your allocation towards mid and small cap. So probably add a large and mid-cap fund, a small-cap fund and a flexi-cap fund.

Ten years plus, you can get more aggressive. So you can have a higher allocation towards a mid-cap and a small-cap fund, and maybe leave out a large-cap or index fund and maybe invest in a flexi-cap fund.

With a 12-to-15-year horizon, it makes a huge difference.

The difference between a 12% return and a 14% return is absolutely mind-boggling, so that cannot be ignored.

When I talk about taking informed risk, I think the risk profile has to be assigned to the goal so that you can understand what you're doing, the purpose of it, how much risk you're taking and how much you're actually mitigating by investing on a monthly basis.

But I don't think for goals that far away you need to have any other asset class but a nice, simple, easy mutual fund depending on the time horizon of the goal.