Begin planning for your child's foreign education this Children's Day

Given the massive cost involved, make an early start, even if you have to do so with only vague estimates of the outlay

On the one hand, competition for the limited number of seats in high-quality educational institutes within India is growing fierce, on the other, disposable incomes are rising. An increasing number of parents are keen to send their children abroad for higher education. If you, too, have such aspirations, this Children’s Day (November 14) is a good occasion to begin planning systematically for this goal.

Foreign education consultants attest to the growing desire among parents to send their children abroad. “The number of students heading abroad for education fell in 2020, but it rose again in 2021. And going by the number of enrolments happening, the number is likely to be even higher in 2021. Interest from tier II and III cities is also growing,” says Neeraj Khanna, co-founder and director of Bengaluru-based Spark Career Mentors. The number of student visas issued by United States alone to Indian students had crossed 55,000 (the highest ever) by end-August.    

Begin early

Since the cost of sending your child abroad for education is significant, you must begin saving and investing for it early. However, when your child is young, you will not know which course or country he will go to. So, begin by making assumptions. “You could have an expensive country and course within it as your target. If the child goes to another geography or course that is less expensive, you will have a surplus, which is fine. Alternatively, begin allocating to this goal based on what you can afford,” says Vishal Dhawan, chief financial planner, Plan Ahead Wealth Advisors.

Adds Arvind A Rao, certified financial planner and founder, Arvind Rao & Associates: “While fixing the target amount, consider both the course fee and the cost of living. It is prudent to keep any stipend the child may earn out of the picture.”

Factor in inflation and currency depreciation

Once you have chosen a country and a course, get an estimate of the current costs from the websites of a few relevant colleges or universities. Take the current cost and apply an inflation factor to it. Take the average consumer inflation for that country, and multiply it by 1.5-2 times to get the education inflation. To that, add another 3 per cent for currency depreciation. If the average consumer inflation is 3 per cent in a country, education inflation will be 4.5-6 per cent. To that, add 3 per cent for currency depreciation. So, factor in an annual inflation rate of 7.5-9 per cent over the current cost.

Portfolio construction         

Choose the asset mix for this portfolio based on your time horizon. If you have more than seven years left before your child heads abroad, build an equity-heavy portfolio. Equity allocation can be as high as 80-100 per cent. “Parents who are more risk averse may want a higher allocation to debt,” says Ankur Kapur, managing partner, Plutus Capital, a Sebi-registered investment advisory firm.

On the equity side, use passive funds (in the large cap space) and flexi-cap active funds. Also, include international funds to counter currency depreciation. “Allocation to international funds can go up to 40-50 per cent to provide an effective hedge against currency depreciation,” says Dhawan. Invest via the systematic investment plan or systematic transfer plan route.

Parents who have a tendency to use up the corpus for other goals may use Unit-Linked Insurance Plans (Ulips). “The five-year lock-in proves useful in their case,” says Rao.

On the fixed-income side, use shorter-duration debt funds. Since the time horizon is long, medium- to longer-duration funds may also be used, but they will be more volatile.

Parents with a girl child may use Sukanya Samriddhi Yojana on the fixed-income side. “The return is attractive at 7.6 per cent and is tax-free,” says Rao. However, bear in mind that timelines for withdrawal are rigid. Public Provident Fund is another product that can be used if the goal is more than 15 years away. You may also include long-term company fixed deposits from blue-chip companies.  

Monitor your portfolio

As your child grows up and you have greater clarity on the country and the course, revise your estimate of the target amount and invest more if required. “Keep an eye on the costs of colleges and courses you are targeting to make sure you are on track,” says Kapur.

Look up your portfolio once every year. When the markets underperform you may lag behind your target. Don’t get discouraged in such years. You may bump up your investments in such years. In years when the market outperforms, you may be ahead of target. Don’t stop or reduce your investments in such years. “Make sure that your active funds are performing consistently and beating their benchmarks,” says Arnav Pandya, founder, Moneyeduschool.   

As you get closer to your goal, reduce equity allocation. “When you are three years away, bring the equity allocation down to 60 per cent, and then to zero over the next two years,” says Pandya. If you have medium- or long-duration debt funds, shift to lower-duration debt funds three years prior to the goal.    

Right from the outset, parents should buy adequate term insurance so that in case the breadwinner passes away early the child's education plans are not compromised.

Mistakes to avoid

Money for this goal is not required at one go. Pay-outs happen over a few years. Also, it is difficult to estimate exactly when the money will be required. You may think that it will be required at 18, but your child may decide to take a year off to develop a skill. Or his admission could get delayed by a year because he did not get the college or the course that he wanted in his first attempt.

Since the timing is not under your control, your money should be in open-ended products that provide complete flexibility of withdrawal. Children's insurance plans, which often have rigid timelines for withdrawal, should be avoided for this reason.

Parents sometimes invest in real estate to meet this goal. If they have two children, they earmark one house for each. Financial planners say this does not work well in practice. “Real estate cycles tend to be long. And in the midst of a downturn, this asset class turns illiquid. Therefore, using financial assets, which offer better liquidity and have shorter cycles, is advisable,” says Dhawan.

Finally, segregate the money you are investing for this goal. Sometimes, when another big goal like house purchase comes up, parents use up this money. As a result, they go off track on this goal. 

What’s in and what’s out in foreign education

Which courses are in demand?

• Apart from the courses mentioned in the table, a few other courses for which demand has picked up in the past couple of years are data science, information science, healthcare related (not medicine itself), business and psychology

Where is demand coming from?

• There has been a definite increase in the number of aspirants from tier II and III cities of India
• There has been a definite increase in number of female aspirants
• Increase in number of students wanting to go for cheaper or shorter diploma type programmes
• There has been an increase in students aspiring to go for undergraduate studies (after XII, earlier students went abroad mostly for postgraduate courses)

Which are the preferred destinations?

• Canada has become perhaps the most common choice for most students largely due to its immigration-friendly policies
• UK is back as an attractive option due to the two-year work visa option after completion of studies
• Parents are feeling a lot more comfortable about the US now with Joe Biden as the president than when Donald Trump was the president, though there have been no significant policy changes; sentiment has improved in anticipation of more immigration-friendly policies coming in. 
• Australia has been a country students and parents like because of the weather conditions. However, lack of jobs and work visas/PR processing is making it less attractive. It may not be a top-5 country in the next couple of years unless it makes changes to its immigration policies for international students. 

Source: Spark Career Mentors

Table: How much a foreign degree costs today

Country	Most popular courses	Average tuition fee (Rs)
US

Computer Science, Engineering, Economics, Business, Pure Science 26-45 lakh

UK

Computer Science, Engineering, Economics, Law, Medicine 18-30 lakh

Canada

Computer Science, Engineering, Economics, Business, Psychology 21-33 lakh France IT, Business, Finance, Fashion, Hospitality 17-27 lakh Australia Business, Engineering, Economics, Hospitality, Architecture 15-26 lakh

The above are annual costs for undergraduate courses; Source: Spark Career Mentors