Case 054Goal and retirement planningCore
A family wants to fund a degree abroad that costs Rs 40 lakh today for a child now 5, needed in 13 years, with education costs rising 8% a year. They hold Rs 15 lakh and expect 10% a year. What monthly SIP closes the gap?
1The situation
The Gaikwade family wants their daughter, now 5, to study abroad for her undergraduate degree at 18. The full cost today, tuition and living, is Rs 40 lakh. Education costs for this route have been rising about 8% a year in rupee terms, which includes some rupee weakness against the currency the fees are paid in.
They already hold Rs 15 lakh earmarked for her, invested in a balanced mix they expect to earn 10% a year. They want a monthly SIP, invested at the start of each month into the same mix, to close whatever gap is left in exactly 13 years.
2Your task
What will the degree cost, how much of it do the existing savings cover, and what monthly SIP funds the rest?
Quick check
Roughly what monthly SIP is needed?
Worked solution
Try it on paper, then open one step at a time.
30-second answerThe answer to give first
A monthly SIP of about Rs 18,389. The Rs 40 lakh degree costs Rs 108.8 lakh in 13 years at 8% inflation. The Rs 15 lakh already saved grows at 10% to Rs 51.8 lakh, covering nearly half. The SIP funds the Rs 57.0 lakh gap over 156 monthly instalments. At 8% returns it rises to about Rs 25,276.
Step 1What does the degree actually cost when it is paid?
A bus fare that was Rs 10 when you were at school is not Rs 10 now; a goal priced in today's rupees has to be moved to the year it is paid. At 8% a year for 13 years, Rs 40 lakh becomes Rs 108.8 lakh, nearly 2.7 times today's price. Education inflation for a degree abroad folds in two things, fee rises and the rupee's fall against the fee currency, so it is usually set above general inflation.
Step 2How much do the existing savings cover?
The Rs 15 lakh is not idle; it compounds alongside the goal. At 10% for 13 years it grows to Rs 51.8 lakh, which covers 48% of the future cost and leaves a gap of Rs 57.0 lakh. Skipping this step is the most common way people overstate what they need to save.
Step 3How do you turn the gap into a monthly amount?
Convert the 10% annual return to a monthly rate, 0.797%, so twelve months compound to exactly 10%. Each rupee invested monthly from the start grows into Rs 310.0 over 156 months, so the SIP is the gap divided by that factor. Rs 57,00,088 over 310.0 is Rs 18,389 a month, Rs 28.7 lakh paid in over the 13 years.
| r | the monthly return, 0.797%, equivalent to 10% a year |
| 156 | months in 13 years |
| (1+r) | each instalment is invested at the start of the month |
| Return assumed | Savings grow to, Rs lakh | Monthly SIP |
|---|---|---|
| 8% a year | 40.8 | Rs 25,276 |
| 10% a year | 51.8 | Rs 18,389 |
| 12% a year | 65.5 | Rs 12,110 |
State the limit and the fix together. The 10% is an assumption, and money needed on a fixed date should move towards debt in the last three or four years, which lowers the return exactly when compounding matters most. So quote Rs 18,389 as the floor, suggest rounding up to about Rs 25,000, and review each year against the actual balance. A step-up SIP that rises with salary is another way to start lower.
Where candidates lose it
The fast wrong answer divides Rs 40 lakh minus Rs 15 lakh by 156 months, about Rs 16,000, which forgets both inflation and growth. The two errors partly cancel, which is why the number looks plausible and survives until the interviewer asks what the degree costs in 13 years.
The other slip is using 10% divided by 12 as the monthly rate. It slightly overstates growth; say you are converting the annual rate so twelve months compound to 10%.
What the interviewer asks next
- What starting SIP would work if it steps up 10% each year?
- The rupee falls faster and education inflation is 10%. What happens to the SIP?
- When would you start moving this money into debt, and why?
Company names and figures are illustrative.