Our approach to helping you meet the costs of your child’s global education is similar to all our financial solutions - learn, plan, invest. The first has been largely covered in our earlier posts - once you have formed your thoughts based on the important considerations and the general costs associated with your child’s foreign education, it’s time to get down to specifics - when, where, how much? The mantra for this goal is like that of any financial goal - start saving and investing early enough and do it using the right tool.
When should we start?
We would recommend that you start planning 4-8 years before the actual education starts. That allows enough time for a corpus to be built without you having to sacrifice your quality of life or other financial goals like retirement planning closer to the goal.
Where should I invest?
Typically, parents use a combination of savings, education loans, and other investments like property, ULIPs, etc to fund this. To begin with, these investments do not even beat inflation. More importantly, what this approach fails to consider is that unlike other financial goals, your child’s foreign education costs need to be met in the currency of the destination country. This means that you have to solve for currency risk - how the rupee will fare against that currency at the time of payment. In 2010, the rupee was 45 against the dollar, today, it is at 72. We expect it to further depreciate 3% annually going forward. What kind of investments can solve this? Presenting the Scripbox plan.
6 key aspects of the Scripbox plan
- Since we are building the corpus over a 6 year period, and a further 2-4 years to start deploying it, we will predominantly build the corpus through equities.
- You could invest in Indian equity funds, and at the end of the period convert the Rupees to dollars. But since that won’t solve for the currency risk, we also bring US equities into the picture. Since those assets are priced in dollars, we eliminate the currency risk! Even better - you gain from US market returns.
- Notice we said ‘also’ in the previous point. That’s because our recommended solution is a mix of both Indian equity funds and US equity funds. A natural question to ask - if investing in US equities is such a great option, why not build the entire corpus there? The jargon is “non-correlated asset class returns”. Since you blinked, and we all prefer English, let’s just say it’s broadly related to diversification and gives you smoother returns thanks to an exposure to two market conditions that are not wholly related to each other.
- But how does one invest in US equities? There are 2 ways. The first is to use the Liberalised Remittance Scheme (LRS) - open an account abroad and invest through the account. We find this to be a cumbersome, complicated route with a ton of paperwork and complex reporting.
The second is to invest through an International Fund of Funds - a mutual fund that invests in other mutual funds. Instead of owning shares of companies, such a mutual fund owns units of other mutual fund(s) that operate in a foreign country (US). These other mutual funds invest in the best stocks in that market (US) - Amazon, Apple etc. If you are KYC enabled, you can invest in such a Fund of Funds immediately, get easy entry and exit from the fund, and benefit from USD-equity returns. The final outcome is the same as investing in the US directly, without being exposed to a currency risk. And finally, the icing: these are taxed as non-equity funds in India.
- Now that we have agreed on the broad investment strategy- Indian and US equity mutual funds - let’s talk specifics. We have curated 2 Indian equity mutual funds and 2 International Fund(s) of Funds, following our standard, rigorous, algorithmic process. We currently project Indian equity returns of 12% per annum*, US equity returns of 6% per annum* and an rupee / dollar annual rate of depreciation at 3% per annum
- The last part of the process is coming up with a solution that is customised for your needs. In other words, how much should you invest today, factoring in the total costs involved, timelines, and your existing investments. We have a calculator that will provide you with the tools to do precisely that.
As a parent, you want your child to get the best education that money can offer. As your trusted partner, we will help you invest your money in the best assets that can work towards the goal. Now close your eyes, visualise that graduation ceremony, and get started.
*Mutual fund investments are subject to market risks. Please read the offer document carefully before investing.