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When you become a parent, giving your child the best possible education becomes non-negotiable. Wanting it is one thing, achieving it, however, is entirely another. And in today’s world, where school and college fees are rising rapidly year after year, how you plan for your child’s education matters.
One way to do this is by using bonds for children’s education in India. Many people tend to only consider equities like stocks, mutual funds, and SIPs. However, for a goal this specific and time-bound, you can also use bonds and NCDs in education planning. In fact, a fixed-income education corpus makes a compelling case for itself.
The returns from bonds are known upfront, so when your child is ready for their higher education or college, you can plan in such a way that their corpus is ready, too. In this article, we’ll discuss how you can create an education fund with bonds.
How Do Bonds Work?
Bonds are classified as debt instruments. They are typically issued by the government (both the central and the state governments). There are also corporate bonds issued by companies in India. Each bond essentially functions as a debt for the issuer. So, when you invest in the bond, the amount you use to purchase it is, in essence, a loan you are giving the issuer. On this amount, they pay you interest at a fixed rate at regular intervals, for a fixed period. At maturity, the principal, which is the amount invested, is returned to you.
For instance, say you invest ₹1 lakh in a 10-year government bond that pays interest at 10% per annum. Every year, you will receive ₹10,000 as interest income. At the end of 10 years, you will receive the amount invested, i.e., ₹1 lakh.
Why Bonds Can Be Used to Fund Children’s Education
If you’re wondering why to choose goal-based bond investments for your child’s education, check out the key reasons to opt for this method.
Clear and Visible Returns
When you invest in a bond, you know exactly how much you will earn and over what period you will earn that income. The interest rate is fixed (except in the case of floating rate bonds), the payment schedule is predetermined, and the maturity value and tenure are known from day one. This is why using bonds for children’s education in India can be helpful.
Range of Maturities for Different Timelines
Every child’s education journey has its own timeline. If your child is three years old today, you have around 15 years before they have to enroll in college. If your child is older, the tenure is reduced. Fortunately, bonds come with a wide range of maturity periods, so you can pick the securities that align precisely with when you will likely need the funds.
Option to Reinvest Coupon Income
This is another reason to create a fixed-income education corpus for your children. Bonds pay you interest at regular intervals. And you can reinvest that income either into more bonds or into other instruments, and let it compound over time. This way, over a period of 15 to 18 years, that reinvested income can make a meaningful difference to the final corpus you have for your child.
Low Correlation With Equity Markets
When the equity markets fall, your bond portfolio remains unaffected by the market risk. For a goal as important as your children’s education, this kind of stability matters. You do not want to deal with a market crash three years before you need the funds, as that could derail the plans you built for a decade. Using bonds and NCDs in your education planning acts as a buffer.
Potential to Ladder Different Bonds
Education expenses are not one-time outlays. There are several instalments you will have to pay over the course of many months or years. You can use a bond laddering plan to stagger the maturities such that a portion of your corpus becomes available at regular intervals. This way, with staggered bonds for your children’s education in India, you can meet different cash flows.
How to Create a Goal-Based Fixed Income Plan Using Bonds
Now that you know why a fixed-income education corpus is beneficial, let us look at how you can create an education fund with bonds.
- Step 1: Define Your Target Corpus
Start by first estimating what your child’s education is likely to cost. Factor in the school or college you have in mind, the current fees, and the rate of educational inflation. This will help you get a reasonable target corpus to begin with.
- Step 2: Establish Your Timelines
How old is your child today? When are they likely to get to the stage of primary, higher, or college education? This gap is your investment horizon, and when you know this, you can choose the right bonds and structure your portfolio according to the timeline you have just determined.
- Step 3: Choose the Types of Bonds
Government bonds carry very low risk and are backed by the government. Corporate bonds offer higher yields but carry more risk. Tax-free bonds can improve your post-tax returns. So, choose from these options based on how much risk you are comfortable taking.
- Step 4: Select Maturities That Align With Your Timeline
Do not pick bonds at random. Make sure you match their maturity dates to your timeline. If higher education is 12 years away, a 12-year bond may be a suitable choice. The goal is to have your money available exactly when your child’s education expense arrives.
- Step 5: Decide on a Laddering Structure (if Applicable)
If your child’s education expenses will unfold over several years, a single bond maturing on one date may not be enough. The laddering method lets you spread the maturities across multiple years, so you have funds available at each stage.
- Step 6: Account for Coupon Reinvestment
Do not let your coupon income sit idle. Reinvesting it, even into shorter-duration bonds or other fixed-income instruments, can keep your money working for you. Over a longer horizon, it can add to your corpus and make a difference.
- Step 7: Factor in Inflation
Education costs can rise at a faster rate than general inflation. So, build a buffer into your target corpus to account for this. You can also diversify into other assets like gold, REITs, and sovereign gold bonds (SGBs) to protect your returns.
- Step 8: Review and Rebalance When Needed
A bond portfolio is not something you can create and forget. As your child gets closer to the age for which you’ve created the fixed-income education corpus, you need to revisit your plan. Check if the corpus is on track or if any bonds need to be replaced.
Must Read
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Invest in Bonds Today to Fund Your Children’s Education Tomorrow
This concludes our guide on using bonds for children’s education in India. You now know why bonds can make a difference and how you can use them to create a fixed-income education corpus.
So, if you want to invest in bonds today to secure your children’s education tomorrow, check out the bond options available on the GoldenPi platform. You can invest in corporate bonds that offer high yields, bonds that offer monthly income, and even highly-rated bonds. You can also invest in non-convertible bonds right from the IPO stage.
FAQs on Using Bonds to Fund Children’s Education
The earlier, the better. So, ideally, you can start investing in bonds when your children are born or within their first few years. With a longer investment horizon, you can tap into better yields and even reinvest the coupon income to get the benefit of compounding.
It is advisable to match maturities to your target date, which is basically the date when your child is likely to start college. If that is, say 15 years away, long-term bonds may be suitable. As the date approaches, you can shift to bonds with shorter maturities to reduce interest rate risk.
Absolutely. You can stagger bond maturities so that some portion of your corpus matures at regular intervals. This can help you manage your children’s annual education expenses, so you do not have to prematurely redeem any bonds.
This is a real risk, and you must plan for this downside. The solution is not to ignore bonds entirely. Instead, you can diversify your portfolio and allocate a small portion of your capital to inflation-beating assets like equities, gold, and REITs.
Start with your target corpus. Then work backwards, choose bonds with maturities that align with your investment horizon, select the credit quality you are comfortable with, and pick bonds with returns that are realistic.
Disclaimer:
This information is for general information purposes only. GoldenPi makes no guarantee on the accuracy of the data provided here; the information displayed is subject to change and is provided on an as-is basis. Nothing contained herein is intended to or shall be deemed to be investment advice, implied or otherwise. Investments in the securities market are subject to market risks. Read all the offer-related documents carefully before investing.
Fixed Deposit schemes are regulated by the Reserve Bank of India. GoldenPi Securities Private Limited is a registered debt broker and acts as a distributor and not as a manufacturer of the product.
