Rohan is an 18-year old, fresh out of junior college, with an ambition to complete his engineering studies. However, the future of this bright young student has hit a hurdle. In 2009-10 when he had set his eyes on engineering, the fees were Rs1.63 lakh (integrated first degree at BITS-Pilani) for the year. The fee for the current year 2014-15 is Rs2.70 lakh, increasing by over 15% a year over five years. Therefore, Rohan would need over Rs18 lakh to cover his technical education over five years, factoring the inflation cost. If he subsequently wanted to do a management course, from a top institute, it would cost another Rs15 lakh or more after five years. Ramesh, Rohan's father, is worried.

Ramesh knew about the rising costs of education and had saved some money but he had made a crucial mistake: not saving in the right products. Ever since Rohan was 10, Ramesh was investing around Rs1 lakh a year in fixed deposits, earning him roughly 6% a year, post-tax. It has just dawned on Ramesh that his savings will fall short by more than Rs6 lakh to cover the fees for the engineering course. Here is how

Ramesh would have to dip into his retirement corpus or take an education loan and Rohan would have to fund his own management studies. What could Ramesh do?

Education costs have been increasing at an alarming pace. With the growing demand for quality education, this could mean a 16% hike per year. For top-ranked private institutions, the inflation can be 20% plus. You cannot plan to finance your child's education with a low income-generating product like fixed deposits.

Here is the best way to plan for your children's education.

1. Invest 65%-80% of the money earmarked for your children's education in well-chosen equity mutual funds which are undoubtedly, the best investment product to make your money grow the fastest over the long term. Only equity funds can beat the inflation in education costs and give you a tax-free income.

2. Invest the rest in bond funds or tax-free bonds, if you are in the 20%+ tax bracket OR in bank deposits if you are in the 10% bracket.

3. If you still fall short, try education loan, which is a good additional option for those who are in the highest tax bracket. The interest paid is fully deductible under Section 80E. Those having a total income of less then Rs4.5 lakh a year can also avail of an interest subsidy for the period of moratorium on the loan. Some banks even offer a 0.5%-1% interest concession for girl students.

Also, to keep your family protected; don't forget to buy a term plan, preferably an online term plan which is cheap.

What if Ramesh had followed this plan? Here is how his money would grow even if he had invested in good quality funds at absolutely the wrong time, which is at the market peak. He would have done better than bank depositors over the long term (10 years or more).

That's all you need to know about saving for children's education. Believe us; almost 80% of the savers are not following this simple plan. Nearly 60% of parents in India wished they saved/planned earlier for their child's education, according to a survey by HSBC titled—The Value of Education. Don't be one of them.

As you would have noticed we have even avoided mentioning child plans of insurance companies. As explained in an earlier here, you will fall horribly short of your expenses if you invest in these plans. They are worse than bank deposits.