How to plan for your child’s foreign education when the rupee is falling

In the last 10 years, the rupee has depreciated 46 percent against the US dollar, 26 percent against the Australian dollar and 25 percent against the Euro.

This has pushed financial advisors to conclude that foreign education will continue to get costlier as time progresses and they believe parents must keep the rupee's devaluation in mind when planning for it.

"The recent sharp depreciation in rupee against US dollar has clearly created a huge shortfall in the foreign education goal of many parents who did not plan it well in advance," said Gurleen Kaur, CEO, Hareepatti.

"Just to understand the magnitude of the loss better, let's look at the history of the current depreciation of rupee. Dollar rate one year back was Rs 64 (approx.) and today, it is Rs 74 (approx.). This is approximately a fall of 15 percent," explained Amar Pandit, CFA, Founder, HappynessFactory.in.

So, assuming the cost of higher studies in the US was around Rs 50 lakh at the beginning of the year, parents sending their children to study abroad would now need to pay an additional Rs 7.80 lakh to make up for the rupee's depreciation.

As one can surmise, the impact of this depreciation is quite pronounced, given that it took place in under 10 months.

"For foreign education goal of a child, assuming it is after 10 years from now we would ideally plan for Rs 50 lakh to Rs 1 crore corpus, but now with currency risks it seems we need to plan for Rs 2 crore corpus," said Kaur.

What one can do if their foreign education goal is short-term

The rupee's continuous fall against the dollar will likely inflate the financial burden parents have to bear if they are to send their children to study abroad.

"A basic approach for an immediate goal which is already in the mid of commitment say 3-6 months will be to increase investible corpus and shift towards high yielding interest rate fixed deposits or park in high rated corporate debentures that pays equivalent coupon rate which will offset overall deficit marginally," Rohira said.

Although the deficit will not be offset completely because of the limited period of time, it will certainly reduce the overall burden.

What one should do if the foreign education goal is for after 5 years

Those planning on a long-term basis (5 years or more) can stick to diversified equity mutual funds through systematic investment plans and gradually top-up the SIP amount. This will help create a decent surplus to make up for any deficit that one may be faced with.

"Rebalance investment portfolio in case you have not taken into consideration the risk of rupee depreciation and inflation costs while deciding upon the corpus," said Manish Kothari, Director and Head of Mutual Funds, Paisabazaar.com.

Parents need to start planning for their children's foreign education early so that that it can be achieved by setting aside smaller amounts and letting the power of compounding do the rest.

For instance, a monthly investment of Rs 20,000 in equity mutual funds can help create a corpus of around Rs 2 crore, provided it is done right after the child is born.

Considering currency depreciation while investing for the long term

The rupee was trading at around Rs 62 to the dollar in October 2013, and is trading at around Rs 74 to the greenback now. This means that the domestic currency depreciated at a rate of 3.6 percent per year.

In a developing nation like India, education inflation is anywhere between 8-10 percent per year, while in developed nations like US or Canada, inflation is anywhere between 0 percent and 3 percent per year.

"Thus, for people who reside in developing nations (India) and plan to study in developed nations (US), education inflation is replaced with currency depreciation. As Indians, we are quite used to high education inflation. If we plan well in advance considering the inflation impact, we won’t feel the currency impact as it was already planned in the form of inflation," Pandit said.

How should one invest when they are close to achieving their goal? 

"One should try and shift at least 50 percent amount from equity mutual funds to balanced mutual funds 5 years before the goal and to debt mutual funds/ fixed deposits 3 years before the goal so as to avoid the market fluctuations like present-day," Kaur advised.

Universities usually charge their fees on a quarterly basis, in which case parents can opt for systematic quarterly withdrawal from the corpus to keep up with the payments. The balance amount should be kept invested so that it keeps earning returns.

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