Intuitively, we know that education costs are increasing at a pace faster than the average inflation. But what happens if your child desires to attend a course in a university in the US or the UK or even Singapore? Or what if overseas education becomes the only option given the skill set that your child has and wants to enhance? Firstly, it’s going to cost more and secondly you need to consider the currency exchange rate.
For an overseas education, you are looking at a tuition expense upwards of Rs 25 lakhs a year depending on the destination and nature of the course. For example, the annual cost of an education in the US today can be up to $ 60,000 (maybe even higher in some cases), which translates to about Rs 43 lakhs. Add to that the living costs and travel expenses, you can be rest assured that some serious planning is required. This must start sooner than later.
The investment strategy is likely to be a combination of a lump sum investment today complemented with regular monthly investments in equity assets.
Ideally, you need a time frame of at least 5 years to cater for such expenses. The longer you can invest, the better because it will lower your initial investment and monthly commitment you need. Let’s say you have ascertained that the course plus living expenses are going to add up to Rs 1 crore today; five years later the inflated cost of this education can be as much as Rs 1.15 crore. Now what?
Put aside at least Rs 25 lakh as a lump sum investment; the higher the lumpsum, lower will be the monthly investment required. For the assumption above, if you want to reach the Rs 1.15 crore target (net of taxes) in 5 years, you will need to invest at least Rs 86,000 in domestic equity mutual funds each month along with the lump sum.
Additionally, the education cost will be paid in foreign currency. While exchange rate is out of your control, investing in feeder funds that in turn invest in overseas equity will help as a partial hedge for rupee depreciation.
However, keep in mind that returns from US equities, for example, are expected to be lower than Indian equities. This means that a combination of Indian and overseas equity will necessitate a higher monthly investment.
The proportion you invest in Indian equity funds and overseas feeder equity funds will be a function of how much time you have and the expected return from both markets. The more time you have, the higher your investment in feeder funds can be. Most importantly, with an early start and regular investment you can achieve even a seemingly unaffordable education cost to fund your child’s desire.