TIME VALUE OF MONEY: SAVING FOR THE

CHILD’S COLLEGE FUND

Case

118-0070-1

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This case was written by D. N Panigrahi (Institute of Management Technology - Nagpur (IMT)). It is intended to
be used as the basis for class discussion rather than to illustrate either effective or ineffective handling of a
management situation. The case was compiled from generalised experience.
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TIME VALUE OF MONEY: SAVING FOR THE CHILD’S COLLEGE FUND

(A CASE STUDY)

In March 2012, Mr. Rajiv Pani, a young MBA, moved to Hyderabad, India for his first job in financial
services industry. He was blessed with a girl child in March 2017. It was 1st week of March 2018 when
Mrs. and Mr. Rajiv Pani were celebrating the 1st birth day of their child. The couple wished to give their
child the best education. But they were worried about the rising cost of higher education in India and
abroad. The couple wanted that their daughter would first pursue a 3-year Bachelor Degree in
Commerce (B.Com) course and thereafter would join a 2-year MBA degree programme from a reputed
Institute like Indian Institute of Management, Ahmedabad, Bangalore or Calcutta. The couple thought
that their child would complete her B.Com at the age of 21 years and then would go for the MBA

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programme. The couple believed that they could make a financial plan for saving and funding their

Taught by V Annapurna, from 2-Jan-2023 to 31-Mar-2023. Order ref F467534.

Purchased for use on the Finance, at Siva Sivani Institute of Management.
child’s MBA programme as part of their new financial year personal finance resolutions.
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FINANCIAL DETAILS

The current cost of the 2-year MBA programme from the premier Indian Institute of Management,
Ahmedabad, Bangalore or Calcutta was about INRs.2,500,000/- covering all costs like tuition fees,
books. Magazines, stationery, hostel, food and other personal expenses etc. It was assumed that the full
course fees as above were to be made available/deposited in the bank account at the time of joining the
course. The couple also learnt from their research that this course fees had been rising on an average by
5% pa.

THE COUPLE’S DILEMMA

The couple weighed various options of funding their daughter’s MBA education cost such as (a) taking
educational loan from a bank at the time of admission, (b) investing in gold and real estate (property)
and (c) investing in financial assets.

Friends, colleagues and family members had given them a variety of opinions about the sources of
financing the cost of this MBA education. Some people suggested them to save regularly in bank
recurring deposit each month to build the fund. Some others suggested to invest in stock markets
regularly which would help them to build a sizable corpus to finance the cost. Some more advised to
save regularly in bank fixed deposit and then reinvest the saved amount in property which would
generate good return to finance the child’s education cost. Still some friends advised them that there
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was no need to save and invest, rather they could go for educational loan in the child’s name at the time
of college admission. Rajiv got confused over these various suggestions.

FINAL CONSIDERATIONS

Rajiv realised that he had a tough decision ahead of him, but he was confident that he was well equipped
to make these types of financial decisions. He recollected his learnings from the course on “Personal
Financial Planning & Wealth Management” during his MBA programme taught by his beloved
Professor D N Dash. The couple made up their mind to start saving regularly every month immediately
and invest prudently to achieve the desired corpus fully out of the saving and investment without going
for any educational loan.

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Rajiv decided that they had to develop a concrete financial plan to meet this important financial goal in

Purchased for use on the Finance, at Siva Sivani Institute of Management.

life. It was time for him to apply some of the personal financial planning techniques he had learnt in his
MBA course – including the “time value of money” concepts, the universal tool of personal finance –
to his personal life.
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SCENARIO ANALYSIS/DECISION PROBLEM

Rajiv also felt that it was worth taking the advice of a professional financial planner. With this objective
in mind the couple called on a well-known financial planner in the city in the weekend. The financial
planner, as usual, asked them to fill up a client data collection questionnaire as well as a risk-profiling
questionnaire. The financial planner also had detailed discussion with the couple and suggested three
alternative mutual funds to them to invest their monthly savings to build the desired education corpus.
During this discussion, the couple had informed the financial planner that they had an existing
investment earmarked for the same goal to the tune of INRs. 300,000/- which had been earning an
average return of 10% p.a. effective so far and they believed that this rate of return would continue in
future also.
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The details of the three alternative funds suggested by the financial planner were given below:

Alternatives Risk-Profile Fund Type Average Expected

Return per annum

(Nominal)

#1 Conservative Secured Fund 9%

#2 Moderate Balanced Fund 12%

#3 Aggressive Equity Fund 15%

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Rajiv also realised that his decision should not be based on quantitative factors alone, he should also

Taught by V Annapurna, from 2-Jan-2023 to 31-Mar-2023. Order ref F467534.

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consider any qualitative factors as well. The couple also felt that they needed to decide soon about their
saving programme in order to accumulate the desired corpus on the target date as saving for the child’s
college fund was an urgent and emotional decision for them.
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References

Kewon, Arthur J. (2015) Personal Finance: Turning Money into Wealth, 7th edition, New York, Pearson.

Dalton, M. A. et al. (2007) Personal Financial Planning, 5th edition, New York, Kaplan Financial.

Brigham, E. F. and Houston, J.F. (2010), Fundamentals of Financial Management, Cengage, USA.

Chandra, Prasanna, (2011), Financial Management, Theory and Practice, Tata McGraw Hill, India.