Equity-heavy portfolio will build corpus for child's education abroad

Parents must not compromise on retirement security to fund their children's higher education

Indian parents may exhaust 48 per cent of their retirement savings for children to do a three-year degree overseas, according to HSBC’s Quality of Life Report (2024). A four-year degree might drain up to 64 per cent of savings.

 

For Indian parents, a post-graduate degree from a foreign university ranks high in priorities. Here is a roadmap for how parents should go about accumulating the large corpus required.

 

Indians go to the United States (US), the United Kingdom (UK), Canada, Australia, Singapore, and mainland Europe to study. “Global exposure, quality infrastructure, and a higher standard of living have given rise to the dreams for sending children abroad for studies,” says Neeraj Khanna, co-founder and director, Spark Career Mentors.

 

Rising disposable incomes have made foreign education accessible. “Multiple banks and financial institutions offer student loans, making it easier to manage costs,” says Khanna.

 

According to Arnav Pandya, founder of Moneyeduschool, families see foreign higher education for children a key requirement in the job market. “It is also considered a pathway to emigration. Families anticipate that if their children are accepted into a course in countries like the US, Canada, Australia, or the UK, they will have a better chance to obtain permanent residency,” says Pandya.

 

Parents “opt for high-interest loans, sell or mortgage homes, or use up retirement savings,” Khanna says.

 

High costs

 

“If one is uncertain about the place of study, it is wise to plan with flexibility,” says Deepesh Raghaw, an investment advisor registered with the Securities and Exchange Board of India (Sebi).

 

Establishing a target amount is challenging, especially for parents of younger children. “An important factor is to determine the timing for sending a child abroad, as it affects the period available to save for it,” says Pandya. 

 

According to Ravi Saraogi, a Sebi-registered investment advisor and co-founder of Samasthiti Advisors, STEM fields (science, technology, engineering, and medicine) are more expensive. “The most expensive regions are the US and the UK, where education is not subsidised, and currencies are strong. Parents need to plan for a minimum budget of Rs 50 lakh per year in today's value,” says Saraogi. 

 

A four-year undergraduate programme can require Rs 2-3 crore, while a postgraduate course can cost Rs 1.5-2 crore.

 

Raghaw suggests that parents aim for a higher corpus as a buffer against uncertainties. “Humanities courses may cost less, but it is prudent to prepare for the possibility of a higher-cost programme,” he says.

 

Consider inflation

 

Inflation in educational courses generally outpaces standard inflation, especially for studies in developed nations. “Parents should budget for an education inflation rate of 7-8 per cent,” says Saraogi.

 

“I use 6 per cent, but for a conservative target, one can assume 10 per cent,” says Raghaw.

 

Given the large corpus required, relying on safer instruments will not yield the necessary growth. Equity investments are essential to build an adequate corpus.

 

Younger parents, whose children will enter college in 10-15 years, can invest heavily in equity mutual funds. Pandya emphasises the need for a diversified portfolio that includes both Indian and global assets. “A balanced mix helps counter currency risk,” he says. 

 

“International REITs provide exposure to global real estate and a regular income stream, generally with moderate returns of 7-9 per cent,” says Pandya.

 

International bond and commodity funds can bring returns and provide protection against inflation but foreign investment options are limited, says Pandya.

 

Commodities, particularly gold, are a valuable addition to hedge a portfolio against currency depreciation. “Gold is priced in US dollar and is a good hedge against currency depreciation,” says Raghaw. Gold exchange traded funds offer exposure to the bullion without the need for physical storage.

 

Key points to remember

 

Khanna advises families to start early, when a child is two to three years old. “Save early, and plan for the most expensive options, like top universities in the US. This way, you will have ample funds to cover any costs,” suggest Khanna.

 

For those with a limited budget, Khanna advises a targeted approach. “Start by assessing costs across nations. Decide which one aligns with both your financial capacity and the child’s goals. Consider not just tuition fees but living expenses,” he adds.

 

Parents need to account for rupee depreciation. “Even if tuition fees remain stable in dollar terms, the value of the rupee is likely to decrease, and costs in rupee terms will rise,” says Pandya.

 

Adequate life insurance is another key when planning for education. “Even if the parents are no longer alive, or the breadwinner is gone, life insurance can cover the education costs of children,” says Raghaw. The insurance amount needs to align with estimated education costs.

 

Saraogi stresses the importance of balancing education goals with other life goals, such as retirement planning. “Parents are emotional about education, and often compromise retirement assets,” he warns.  

 

Drawing from Public Provident Fund or Employees Provident Fund to fund education costs can leave parents financially vulnerable later.    

Is Sukanya Samriddhi Yojana right for you? 

• Account can be opened for a girl child below 10 yrs; matures after 21 financial yrs
• Can open for two daughters; maximum investment of Rs 1.5 lakh per child annually 

Pros 

• Offers 8.2% annual interest rate, gets exempt-exempt-exempt tax treatment
• Free from market risk due to government backing
• Early closure allowed if the girl is 18 and marrying; partial withdrawal permitted at age 18 or post-10th standard, capped at 50% of balance from previous year 

Cons 

• May be restrictive for those needing funds for class XII or undergraduate education
• Contributions only allowed for 15 years
• Change in residency status must be reported within one month to prevent account closure 

 

 

Cost of foreign education

 

US: Rs 65-95 lakh

 

UK: Rs 44-78 lakh

 

EU: Rs 33-67 lakh

 

Australia: Rs 34-80 lakh  Source: Spark Career Mentors