Suraj Sinha has been rather pensive, of late. A mid-manager at a corporate on an enviable salary, he thought he was leading a fiscally sound life. No home loan to pay off, no shopping-binge liabilities, no ailing parents to support. Just one kid-his five-year-old Shantanu.

But then, reality hit him. He had to cough up a minor fortune to have Shantanu admitted to a school; and has discovered that this is just the first step of an escalator he committed himself to six years ago. Shantanu, chortling away, of course, doesn't have a clue why daddy has turned so quiet.

Daddy dear is burdened by three facts. Education is no longer the incidental expense it was for his own parents, his job is a lot less secure, and his son will aspire to the hallowed portals of American Ivy League colleges. He could say 'heck, school is school', and opt for the state-subsidised systems. But then, quality gaps are said to have widened beyond all hope. Is there a way out?

Start Early, Estimate Budget

The best time to start investing for your child's education is when you hear those first few bawls from the cradle. Time makes all the difference.

First, make a budget estimate by looking at current fees. Boarding schools such as Lawrence, Doon and Welham are upwards of Rs 1.5 lakh per annum, all expenses included, while good day schools such as Cathedral, J.B. Petit and Bombay Scottish in Mumbai cost around a fifth of that just in fees. A good local undergrad college, say St Xavier's or Narsee Monjee, would be around the same-Rs 30,000 for three years. An MBA after that could cost some Rs 4 lakh at an IIM, or Rs 9 lakh at ISB. The real nose-bleeder is an Ivy League college in the US; Harvard could mean $37,500 per year (or some Rs 17.5 lakh for a four-year liberal arts degree). And all these are current rates-even with inflation of just 5 per cent, these will sound like the proverbial 'good old days' in 20 years.

Educate Yourself, Invest

You may opt to create your own portfolio for your child's education fund, with a blend of stocks, mutual funds, fixed deposits and other investments. Rajiv Bajaj, Managing Director, Bajaj Capital, advises parents to approach the entire issue as any other investment-with clarity on your target sum and risk appetite.

Typically, the word 'child' evokes 'safety', and so debt investments seem attractive. But given the low interest rates, you need to think beyond that. You could start with some portion of equities, perhaps, and gradually replace it with high-liquidity debt as your child's education expenses mount-to get yourself a safety cushion.

That said, don't ignore the 'solutions' that insurers have to offer. "You as a parent have to set a goal and quantify it," says Pankaj Seith, Head (Marketing), HDFC Standard Life Insurance, "after which the reverse calculation of the premiums is worked out by us." Most such deals involve putting in some money against the promise of returns fat enough to pay the fees. If you're given to comparing returns, these deals could seem tightfisted. The premiums sound way too high for the sums delivered to pay the fees.

But there's a reason for that. "Insurance is important for an education portfolio because it has a life cover aspect to it," says Sujata Dutta, Head (Marketing), Tata AIG Life Insurance. "If the sole earning parent dies, not only are future premiums waived, but the child education plan also doesn't suffer. This benefit is not there in any other investment vehicle."

The Peg Ratio
A ratio to hang your portfolio by? Maybe not. But useful nonetheless.

By Narendra Nathan

Price. This, first and foremost, is what a stock-picker must make sense of. In theory, this means comparing the stock's market price with its intrinsic value. "The successful investor is one who invests only when the market price is far below (this gap is known as the 'margin of safety' in finance) its intrinsic value," says Raamdeo Agrawal, Joint Managing Director, Motilal Oswal Securities.

But the first casualty of a stockmarket boom is this margin of safety. The stock is no longer available 'cheap', especially if one goes by traditional valuation parameters such as the price-earnings (PE) ratio, calculated by dividing the share price (P) by the earnings-per-share (EPS). This is typically when analysts turn to the peg ratio.

What is it? A ratio. The PE divided by the earnings growth rate (g). The idea is to take future growth expectations into account.

What difference does it make? Imagine two companies, X and Y, both quoting at Rs 100 each, with an EPS of Rs 5 each. Their PE: 20 each. Assume you have good reason to believe that company X will grow at 10 per cent, while Y will grow at 30 per cent. Assume also a bull run, with market frenzy pushing all prices up. Company X rises to Rs 120 next year, while company Y, powered by its faster-growth story, goes to Rs 150. This would give X a PE ratio of 21.8 and Y a less attractive ratio of 23.1. Which of the two stocks are better valued?

If you go by simple PE, you will be misled-since the growth difference hasn't gone away.

Had you picked on the basis of the peg ratio, by dividing the stock's PE by the growth rate, you would've stuck with Y. For the current year, the peg of X is 2, while that of Y is 0.67. A year hence, X is 2.18 and Y is 0.77 "As a thumbrule, peg below one is treated as cheap while above one is treated as costly," says Gurunath Mudlapur, Head of Research at Khandwala Securities.

Now apply the concept to the top 10 Nifty scrips, and you will find that Hindustan Lever and Wipro, for instance, are highly priced even after taking prospective growth (by analysts' 2003-04 estimates) into account.

Neat? Sure. But don't rush off to peg your future on the ratio. Growth expectations could depend on varying investment horizons. Moreover, the peg ratio tends to fail in special cases. A start-up growing furiously on a small base could look very tempting, for example, while a large powerhouse could look dangerously overpriced. It's no substitute for intimate corporate knowledge.