Amongst all significant milestones in our lives, providing for child's higher education is also at the back of our mind. The figure is large and so we tend to only consider that figure and target for its achievement via instruments like insurance policies and similar.

While we have the big picture in mind we tend to miss the overall picture. We need to understand that planning for child's education is not making provision only for that large sum of money but there are going to be continuous cash outflows before that large expense and probably some regular cash outflows even after that.

Lets explore this a little more to find out how one should exactly go about planning for child's entire career span. This article being a sequel to the previous one; we shall continue with the case study of Dr. Shastri. Here's a summary of the case facts for the one's who missed the previous article.

1. Rahul (Child's) Age - 12 years and currently studying in class 6.

2. Expenses estimates

a. Rs. 40,000 a year, upto Rahul's second year of junior college (standard 12th)
b. Additional Rs. 25000 will be required during standard 10th and Rs. 50000 during standard 12th
c. Rs. 1,50,000 a year, for the 5 ½ years of his MBBS degree, including internship
d. Rs. 12,00,000   in total over the 6 years of Rahul's post-graduation and specialisation as a cardiac surgeon.

3.  Current provisions made

a. A Komal Jeevan policy from LIC
b. A Smart Kid policy from ICICI Prudential Life Insurance
c. An investment of Rs. 2 lacs in HDFC Mutual Funds Children's Gift Fund 2 years ago

Planning to be made for 18 years i.e. till he qualifies as a surgeon

The objective of a good education plan should be to create a strategy so that we are able simply withdraw a said amount as and when required. We should be in a position where we do not have to literally put our hands in our pockets. The funding strategy works like a pot of money from which we withdraw money as education demands mature, period.

While a comprehensive plan would involve a fair level of mathematics, intricate investment and cashflow planning we shall use the approximate method as suggested in the previous article. Like I said earlier this will give a good approximation for you to understand where you stand.

Here is the method again for your reference;

1) Put down on paper estimated expenses (be as realistic as possible) for each year from now until the end of your child's education. Call this value “A”.

2) Total up all the funds you will get in future given the provisions you have made today for your child's education. Call this value “B”.

3) If the child is less than 12 years of age, multiply value A by 2 and divide value B by 2. If the child is more than 12 years of age, multiply value A by 1.5 and divide value B by 1.5.

4) Now consider C = B-A (i.e. subtract A from B), if the difference is   negative you have serious reasons to worry.

In our example above,

Value A = Rs. 22.65 lacs, rounded off to Rs. 23 lacs

Value B = Rs. 14.85 lacs, rounded off to Rs. 15 lacs

Applying step 3 of the method above i.e.;

Multiply value A by 2 = Rs. 46 lacs

Dividing value B by 2 = Rs. 7.5 lacs

Hence C = Funding gap = Rs. 38.5 lacs

Our options to bridge this funding gap depend on the level of investment returns we are capable of generating;

Say we are a conservative lot and want to depend only on traditional instruments which can give us no more than 6% p.a. the options before us are;       ï�±             Invest Rs. 1.18 lacs per annum OR ï�±             Invest Rs. 30,000 per quarter OR ï�±             Invest Rs. 9,900 per month

If we take a moderate stance and are willing to take some equity exposure via Unit linked insurance plans and aim to get a 9% p.a. investment returns the options before us are;   ï�±             Invest Rs. 86,000 per annum OR ï�±             Invest Rs. 21,400 per quarter OR ï�±             Invest Rs. 7,100 per month

An aggressive stance using mutual funds as well would enable us to target a return of say 12% p.a. or more. Our options then look like the following;       ï�±             Invest Rs. 62,000 per annum OR ï�±             Invest Rs. 15,200 per quarter OR ï�±             Invest Rs. 5,000 per month

The stance we take will also be dictated by the cashflows we have today and what we can afford. To clarify this, say if we could only spare about Rs. 5000 per month for planning our child's education we don't have much of an option but to take an aggressive stance.

Before going forward here is an indicative ready reckoner of what one needs to invest if one had a funding gap of say Rs. 10 lacs. Workings have been done using 2 scenarios viz., 10 years and 20 years. You can simply multiply the numbers in line with your funding gap and see where you stand

Planning years	Conservative Stance	Moderate Stance	Aggressive Stance
	Investment returns 6% at max.	Investment returns 10%+/-	Investment returns 12%+
	Invest Rs.71,500 p.a. or	Invest Rs.60,000 p.a. or	Invest Rs.51,000 p.a. or
10 years	Invest Rs.18,000 p.q. or	Invest Rs.15,000 p.q. or	Invest Rs.13,000 p.q. or
	Invest Rs.6,000 p.m.	Invest Rs.5,000 p.m.	Invest Rs.4,500 p.m.
	Invest Rs.25,000 p.a. or	Invest Rs.18,000 p.a. or	Invest Rs.12,500 p.a. or
20 years	Invest Rs.6,500 p.q. or	Invest Rs.4,400 p.q. or	Invest Rs.3,000 p.q. or
	Invest Rs.2,000 p.m.	Invest Rs.1,500 p.m.	Invest Rs.1,000 p.m.

Note: p.a. means per annum, p.q. means per quarter, p.m. means per month.The next question is where to invest? This would entirely depend on your stance and is very individual specific. It would be done in line with other factors such as income, affordability, risk, level of gearing, level of insurance etc. Here are some general indicative rules however;

For generating 6% consider; Traditional Insurance policies, RD's, FD's, NSC's, PPF, Bonds etc.

For 10%; about 50% must be invested in PPF & bonds, balance 30% in equity oriented ULIPs and 20% in equity mutual funds.

For 12%; about 20% in PPF & bonds, 80% in various mutual funds placed in a planned manner with expert advice and consultation.

This unfortunately is only the beginning. One needs to then ensure that expectations culminate into reality. It could be done by regular monitoring and /or by seeking appropriate advice. One needs to do this exercise each year to either reconfirm that no expense estimates have changed or if the expense estimates have actually changed it is well warranted that this exercise is redone year after year.

Finally, quoting from the previous article...

Education funding for your child is going to be probably the most expensive and the most indispensable investment of your life. But if it is planned for well in advance it would not merely remain a dream and be a huge drain on financial resources.