Higher education in foreign countries can burn a hole in your pocket. But there is way around it. Apart from an education loan, there are various other avenues available for parents to explore. Nimesh Shah tells you that carefully planning your child’s future is half the work done
Students from India are increasingly looking at opportunities abroad for higher studies to gain global exposure, better employment opportunities and in some cases to study a niche course in a specific department. In today’s highly competitive global environment, education abroad is seen as an accelerated way to better employability. Many organisations prefer individuals with an ability to adapt in multi-cultural environment. For long, foreign universities have also been a preferred choice for parents to send their children. It would not be wrong to say that, most of the Indians place a great deal of importance to a foreign degree.
However, most parents fail to consider the prohibitive growth in the cost of such foreign education. To put in perspective, a rising education cost and currency volatility, if not factored in, could put a whammy on your child’s aspirations. To fund your child's overseas education it is of utmost importance to follow a systematic approach-, estimate the costs, choose the right investment instruments, de-risk the corpus and above all start early.
Reckon the costs
To begin with, estimate all the costs associated with overseas education. And, this doesn't begin at the fee structure for international universities; rather, at the entrance exams. For instance, TOEFl (Test of English as a Foreign language), costs around US$160, while the cost to take GMAT (Graduation Management Admission Test) globally is around US $250. If the students are unable to cope with the entrance preparations by themselves, an option of joining the entrance coaching centers cannot be eliminated.
Once the entrance examination is through, next in line is the process of filling university applications based on subjective preferences. These universities charge an application fee of around $100, multiply which by the number of universities your child is applying to. Further,the fee structure, cost of living, books, travel, and other miscellaneous expenses need to be estimated.
Add to this, the change in exchange rates over the years, and you will realise that there can be no amount of laxity in financial planning for your child's overseas education.For instance, in the beginning of last financial year, the rupee was at Rs 54 levels against the dollar; now it is hovering at Rs 61 levels. So, future exchange rate fluctuation becomes an important parameter to account for.
Finally, a rising inflation can chew into your portfolio returns. Parents could study the historical trends of inflation in the relevant country, take an average annual inflation rate on the conservative side and start investing as per the future value of financial goals for children.
Mutual fund way
Funding an overseas education requires regular and disciplined investing. In the formative years of the child, higher exposure to equities is advised to ensure growth while in the later part of the investment horizon it is better to increase exposure towards debt to ensure stability. It is a tedious task to switch between asset classes without the right knowledge and expertise. Plus, you would want to make sure that the money being invested for your child’s career is in the hands of a professional. Mutual funds fits the peg well, as you may be able to derive benefits of professional management and diversification at a very low cost. It also gives the option of a systematic investment plan (SIP) which ensures that a fixed amount of money is socked away every month which over a period of time may swell up to form a reasonable corpus for future goals.
Within mutual fund schemes, are child care plans, a category, specifically designed to help you give your child a head start in life by leveraging the opportunities and dynamism of equity and debt markets.
Such funds invest more than 65% of your money in equity and equity related securities to leverage growth opportunities, and the remaining is normally invested in debt securities to seek stability for your investments. Equities give opportunity to beat the inflation. Over the short-term, equities could be volatile but over the longer term, they have the potential to outperform other asset classes and deliver superior returns.
Having more than 65% investment in equities apart from offering better returns also ensures taxation efficiency since investments made in such funds are exempt from capital gains tax provided investments are held for more than a year.
Childcare plans come with aggressive as well as conservative variants; you can invest in either of them depending on your investment horizon. For example, if you are investing at a stage when your child is still in school and some years away from pursuing studies abroad, you may invest in schemes with higher asset allocation to equities. On the contrary, if you are closer to your child's financial goal, it is better to opt for a debt oriented child care plan.
To cushion one’s portfolio from currency fluctuations, one can also allocate a part of investments towards international funds focused on developed markets. For instance, if your child is willing to study in the US, investing in a fund focused on US blue chip companies could be a good hedge to the currency fluctuations.
Start now
Children hold a center stage in parents' lives; so much so that parents prioritize their children's milestone goals above their own retirement. In all probability, funding your child's education abroad is likely to be a heavy-weight expenditure, and you need to make sure that it doesn't hurt your retirement. The earlier you start, the more time your money can benefit from ‘the power of compounding’. Invest for your child today and secure the future years of his/her life.
The writer is Nimesh Shah, MD & CEO, ICICI Prudential AMC.