Studying in a foreign university was once a dream only the uber intelligent or the super rich could see. But now, every Tanmoy, Deepak and Hari aspires for a foreign degree. And for good reason too. The supply of quality education in India is outstripped by the demand.
The cut-off percentage for some of the coveted courses in top colleges has hit 99 per cent. “The acceptance rate in Indian colleges offering quality education is below 2 per cent,” says Vibha Kagzi, Founder and CEO, ReachIvy. This has forced many Indians to look for education overseas.
How much it costs
Studying abroad can be prohibitively expensive. One year’s tuition fee in some Ivy League colleges can be almost ₹30-35 lakh. Apart from this, there are other costs to look at as well. Take the cost of living, comprising accommodation, conveyance, academic supplies, health insurance and entertainment, add another ₹10 lakh. Besides, you also need to factor in inflation and rupee depreciation. “A course lasts for 2-4 years and fund requirement can change drastically with the fluctuations in the exchange rate,” says Renu Maheshwari, Founder, Finscholarz Wealth Managers.
If you plan to send your child abroad, keep a target of at least ₹50 lakh for a three-year course. Factor in 8 per cent inflation to calculate the future cost. In 10 years, the present cost of ₹50 lakh for a threeyear course would have risen to ₹1.07 crore. An eight-figure amount may seem daunting right now, but it is achievable with disciplined investing.
Easy for early birds
The goal is easily achievable for the early starters. Financial planners say one should start saving for the child’s education as soon as the child is born. The SIP required for a corpus of ₹50 lakh will not be prohibitively high. The outflow will be in small portions and therefore, will not put a burden on your overall finances. Longer time horizon also gives you room for investing in high-risk instruments.
Invest in the right option
An early start will not help you finish the job though as it is also important to invest right. A key determinant of asset allocation should be the number of years left for the goal. Equity funds should be the preferred investment if you have more than 8-10 years before the goal.
Maheshwari says that it is safe to direct 65-70 per cent of your investments to equities if you have a sufficiently long investing horizon. For best results, choose a balanced fund, as they invest in a mix of stocks and bonds and get the same tax treatment that equity funds enjoy. Longterm gains are tax free up to ₹1 lakh and are taxed at 10 per cent beyond that.
Options for late starters
For the late starters, the ideal strategy would be to start an SIP along with lump sum investments. Short-term debt funds are not very volatile and the returns are roughly equal to the bond yields and enjoy lower tax rates than fixed deposits if held for over three years.
You can also consider taking an education loan. Education loans are eligible for tax benefits which bring down the effective cost of the borrowing.
For the conservative investor
A child’s higher education is a nonnegotiable goal that cannot be postponed. And, conservative investors will have to save substantially more. Take the case of 25-year-old Anshika Rawat, who is going to Netherlands for her Master of Science. Anshika’s father started saving early but will still have to use a part of his retirement savings. In the long run, returns from fixed-income securities may not be able to meet inflation. Advisers suggest mixing public provident fund and debt funds for tax efficiency on investments.
A recurring deposit is another good option since it allows the investor to lock in at a high rate.
When nearing the goal
The investment strategy has to be dynamic in a long-term goal like your child’s education. And, as you approach the goal the risk appetite should be lowered. Equity is volatile, so you should shift your funds into the safety of debt instruments when you are 2-3 years away from the goal. Capital protection is the key in the last year of your goal.
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