Financial Planning For Your Child’s Higher Education Abroad

Investing in your child’s education is one of the most important financial commitments you will make as a parent. With the rising costs of education, particularly at renowned institutions abroad, early and strategic planning is crucial. The article provides guidelines on building a corpus through wise investments in mutual funds 

Every year, countless parents aspire to send their children abroad for higher education. Countries like the USA, UK, Canada and Australia are among the top choices for international study. However, financing your child’s education overseas can be a significant challenge. However, with careful planning and smart financial management, you can turn your child’s dream of studying abroad into reality. If you are feeling concerned, there’s no need to worry! [EasyDNNnews:PaidContentStart]

Investing in your child’s education is one of the most important financial commitments you will make as a parent. With the rising costs of education, particularly at renowned institutions abroad, early and strategic planning is crucial. In India, education is highly valued, and we strive to give our children the best opportunities available. However, these aspirations often come with significant expenses, prompting many parents to rely heavily on their savings or even take loans to finance their child’s education overseas. 

When planning to study abroad, the expenses generally fall into two main categories: tuition fees and the cost of living. In addition to tuition fees, other costs include accommodation, transportation, food, electricity and utilities. The total cost of studying abroad can range from ₹20 -25 lakhs to as much as ₹1-1.5 crore. To manage these expenses effectively, parents need to engage in long-term planning, investment and careful budgeting. These amounts vary based on which course you have selected and the country in which you are going to study. 

Can mutual funds help us to manage this future expense? Investing in mutual funds designed for long-term goals such as education allows you to systematically build a strong financial corpus over time. The power of compounding, combined with a disciplined investment strategy, can significantly help close the gap between your current savings and the future costs of education. The sooner you begin, the more you can harness the growth potential of these investments, ensuring that when the time comes, finances won’t stand in the way of your child’s academic aspirations. 

First Things First
Shortlisting the country, university and knowing your target amount or goal is essential for creating an effective plan and a step-by-step guide to achieve it. The first step is to determine the cost of education abroad. Since you are planning to send your child overseas for further studies, Indian rupee won’t be accepted directly. It will need to be converted into the local currency of the country where higher education has to be pursued. 

For example, consider Harvard University as a case study. Research indicates that the average cost of education at Harvard University is around USD 80,263, which equates to approximately ₹67.42 lakhs. But is this amount fixed or variable? The key challenge here is that it’s not fixed—currency exchange rates fluctuate continuously, as trading occurs round-the-clock in the global markets, causing rates to change every minute. 

Currency Fluctuations Can’t Be Ignored
The US dollar (USD) is one of the most widely accepted and traded currencies globally, serving as a standard for international transactions. Currently, 1 USD is roughly equal to ₹84. Historically, there was a time when the exchange rate was less than ₹5 per USD, which might be surprising to many. However, as of 2024, the exchange rate stands at approximately ₹84 per US dollar. The USD remains the primary benchmark when evaluating the strength or weakness of the Indian rupee (INR) against other currencies. 

The chart illustrates the fluctuations in the INR against the USD over time. In 1947, 1 USD was equivalent to ₹3.30. This rate gradually depreciated, reaching approximately ₹50 by 2007. After stabilising at around ₹50 for a few years, the rupee depreciated further, crossing ₹70 per USD in 2018. By 2022, it started trading above ₹80, and as of now, it stands at around ₹84 per dollar. You might wonder why we are discussing the USD-INR relationship and its historical data in a financial planning article. However, as we progress, you will see how this information is crucial. 

SIP in Nifty Index Fund: Is it Sufficient for a Child’s Education Abroad?
Keeping all these currency issues and complexities aside, let us focus on whether it would be sufficient for your child’s education if you have started investing ₹8,000 a month started 20 years back in a Nifty index fund. 

With a CAGR return of 12.67 per cent, your investment of ₹16.03 lakhs would have grown to ₹61.33 lakh, yielding an absolute return of approximately 282.62 per cent. However, the critical question remains: is this amount sufficient? Earlier, we discussed that the average cost of attending Harvard University is USD 80,263. Based on your accumulated corpus of ₹61.33 lakhs, you would still fall short by USD 7,247. If the INR further depreciates to ₹85 per USD, this shortfall will increase to USD 8,945. For instance, in 2018, when USD 1 was equal to ₹70, the same Harvard tuition fee of USD 80,263 would have been equivalent to ₹56.18 lakhs. 

Due to the INR’s depreciation, that cost has now surged to ₹67.42 lakhs. This highlights the significant impact of currency fluctuations. If the INR depreciates further, the ₹61.33 lakhs you accumulated through your Nifty mutual fund investment may still fall short of covering the full cost. The timing of when you redeem your fund is also an important factor. If you had redeemed your investment in 2020, the corpus would have been different, even if you had invested with an increased SIP amount, such as ₹10,000 or ₹15,000 per month. While the market conditions are favourable today, the situation was quite different in 2020. 

Adjusted SIP Return in USD 

The data above illustrates the investment growth over the same period. An investment of ₹16,03,000, with a SIP of ₹7,000 per month, grew 45.80 times. By 2024, this investment value increased to ₹61.33 lakhs, compared to ₹38,477 in 2005, reflecting a growth of 159.40 times. However, when converted into USD, the growth is only 85.63 times, primarily due to fluctuations in the USD-INR exchange rate. The rate at which the investment value increased in USD terms is significantly lower compared to the rate of increase in INR terms. Additionally, redeeming these funds will incur taxes, either short-term capital gains (STCG) or long-term capital gains (LTCG), depending on the holding period. This will ultimately reduce your overall profits. 

Are International Mutual Funds a Good Choice?
As the name suggests, an international mutual fund invests in companies in foreign countries. Hence, these funds are also called foreign mutual funds or overseas funds. There are active funds, funds of funds, and index funds investing in foreign indices like Nasdaq in USA. As per SEBI norms, international mutual funds have to invest a minimum of 95 per cent of assets outside India, including any equity companies listed abroad, ADRs and GDRs of Indian companies, ETFs of other companies, and mutual fund units of foreign companies. 

An equity fund is an equity-oriented actively managed international mutual fund in which the fund manager directly invests in foreign equity or companies listed outside India. These funds usually fall under the thematic category. For example, ICICI Prudential US Blue Chip Equity Fund and Nippon India US Equity Opportunities Fund. An index fund is a passive style of international mutual fund where the fund manager directly invests in the broader market for foreign equity by investing in its index. 

For example, Motilal Oswal NASDAQ 100 FOF is a passive index fund that invests in all the components of the 100 largest non-financial companies listed on the Nasdaq stock market in the US, based on market capitalisation. Fund of funds is an investment strategy of holding a portfolio of other investment funds rather than investing directly in stocks, bonds or other securities. An FOF scheme primarily invests in the units of another mutual fund scheme. 

Investing in international mutual funds offers several key advantages:
■ Diversification: International mutual funds offer exposure to foreign markets, enabling investors to diversify their portfolios and reduce risk by spreading investments across various economies. For instance, even if you are based in India, these funds allow you to invest in top companies listed in the US market, such as Google, Microsoft, and others.
■ Growth Potential: These funds offer access to the growth opportunities in foreign markets, especially in emerging economies, which may have higher growth prospects than domestic markets.
■ Currency Hedge: Investing in international mutual funds can serve as a currency hedge, protecting investors from the depreciation of the Indian rupee while benefiting from the appreciation of foreign currencies. As analysed earlier, the historical USD-INR exchange rate, which was around ₹60 to ₹65 a decade ago, has now risen to approximately ₹84. This indicates that the INR has depreciated during this period, with no strong signs of imminent appreciation. As a result, the USD is appreciating against the INR, making investments in foreign or international funds potentially more profitable by allowing investors to gain from the strengthening of the USD. 

Factors to Consider Before Investing in International Mutual Funds in India
■ Risks: International funds come with various risks, including currency risk. For instance, if you invest in a US-centric fund and the Indian rupee depreciates against the US dollar, the NAV of the fund increases, as you get more rupees per dollar. Conversely, if the rupee appreciates, the NAV declines. Understanding these risks is essential for informed decision-making.
■ Macroeconomic Factors: The political, economic, and social environment of the country where the fund is invested can greatly influence its performance. It’s crucial to stay informed about these macroeconomic factors and monitor them closely to evaluate their potential impact on your investment. For instance, if you had invested in a fund focused on European markets and a war between Russia and Ukraine suddenly erupted, it would not only impact the local markets in those countries but also create ripple effects across the global markets, including the Indian markets.
■ Multiple Economy Benefit: Investing in international funds allows you to benefit from the growth of multiple economies, not just the Indian market. This diversification can lead to better returns and enhance the quality of your investment portfolio.
■ Tax Implications: International mutual funds are generally treated as Debt Funds for tax purposes in India, as they primarily invest in foreign equities rather than domestic ones. This means that the tax rules for long-term capital gains (LTCG) and short-term capital gains (STCG) applicable to debt funds also apply to international funds. Understanding the tax implications is crucial for effective financial planning. 

Conclusion
Investing in Indian mutual funds can be a prudent strategy to secure your child’s education abroad. Indian funds have delivered impressive returns, approximately 12.67 per cent in our case, translating to an absolute return of around 282 per cent. Considering the trend of USD and INR exchange rates, the Indian rupee has depreciated significantly over time. Yet, even when factoring in this depreciation along with the tax implications on redemption, Indian funds still present a more attractive return compared to international funds. 

However, for diversification and hedging against currency fluctuations, it may be prudent to allocate a portion of your savings into international funds, especially after thoroughly understanding the key factors involved in such investments. In this context, the appreciation of the dollar or depreciation of the rupee could enhance your returns, which impact Indian mutual funds focusing on the domestic market. It’s also important to note that international funds are influenced by various macroeconomic factors, requiring investors to continuously monitor and stay informed about major economic activities.

[EasyDNNnews:PaidContentEnd] [EasyDNNnews:UnPaidContentStart]

[EasyDNNnews:UnPaidContentEnd]