Saving for your child's foreign education? Invest in US index funds

Thanks to remarkable progress in science and technology, the US has witnessed unprecedented growth in the recent past. It is no surprise that the S&P 500, an index of the top 500 publicly traded US companies is weighted towards prominent American tech giants. Furthermore, looking at the S&P 500 from 2001 to 2020, the average US stock market return for the last 20 years is around 7.45 percent.

So, if you invested $100 in the S&P 500 at the beginning of 2000, you would have about $421 at the beginning of 2021, assuming you reinvested all dividends, which means your investment would have nearly doubled in approximately nine years.

With the power of big data and the boom of Artificial Intelligence and machine learning, the momentum of American technological advances will continue its bull run well into the future. Such consistent growth is yet to take form in other global markets. With corporate profits on the rise, America’s free-market economy has survived the pandemic, supply constraints, and labour shortages. The same cannot be said about other developed countries such as France, Italy and even Germany, whose economic performance has declined sharply, exposing the vulnerabilities in the growth model of these countries. The US, however, continues to reign supreme. In the year of coronavirus, the US stock market soared, with high-flying firms such as Apple, Microsoft, and Google parent Alphabet powering this year’s rally.

If you are considering investing your hard-earned money in a foreign economy, you want to make sure that your investment fares well regardless of the market atmosphere. As the fertile ground for investments, the US market is a channel to generate stable returns for your child’s future.

India now delivers the second largest population of students studying abroad, with more than 50 percent of Indian students studying in North America. The total number of Indians pursuing their higher education in the United States and the UK, Canada, and Australia has grown steadily over the years, apart from the brief hiatus amid the pandemic. As per the Ministry of External Affairs of India, in 2020 alone, 261,406 Indian students went abroad, contributing $7.6 billion to just the US economy. As of August 2021, both the US and the UK have, again, accepted record numbers of Indian students to universities.

There is no doubt that to avail a degree from a high-ranking university, families need to be financially prepared. Therefore, taking into account the rising costs of higher education and rupee depreciation, investing in the US stock market is something you should consider.

With the value of the Indian rupee against the dollar, the British pound, and the euro falling by astonishing margins, higher education abroad is only getting more expensive for Indian students. The effects of the devaluation of the rupee only exacerbate the cost of higher education. A weaker rupee also makes taking education loans a considerably expensive affair. To put this in perspective, if the cost of a Harvard MBA is around $81,272 for a year, you as an Indian family would have to shell out about Rs 60 lakh in 2021 (1 USD = 74.96 INR), versus Rs 50 lakh in 2015 (1 USD = 64.13 INR). However, investing in the US stock market can help alleviate a significant chunk of the problem. Diversifying your investment portfolio with US Stocks will come in handy when your child is ready for their studies abroad as the returns can be used in dollar terms.

Investing in US Stocks, you can earn profits even with zero change in stock price. What that essentially means is that if at the time of selling a stock, the stock price has not changed, but the rupee has weakened by, say, 10 percent against the dollar, while converting the dollar back to INR, you stand to gain because of the value of USD. Moreover, a fall in Indian Rupee against US Dollar, in fact, benefits Indians investing abroad because when the currency of the US stock appreciates, then there is an additional return on top of the holding period return in the asset. A depreciated rupee, and thereby a stronger dollar, will add to the return. So if you invest in the S&P 500 index, for example, a 5 percent appreciation in the S&P 500 and a 2 percent dollar appreciation in the same year would result in returns of 5 percent plus 2 percent approximately in INR terms.

To achieve the same in India, you would have to invest more funds, use more leverage to see the same results. Also, US equities are far more liquid, meaning that the volume of trades is significantly greater, indicating bigger market moves in shorter periods.

Investing in US stocks directly correlates to Indians planning their child’s future education. While education expenses abroad may feel like they are out of your budget, they do not necessarily have to be if you plan early and start saving for your child while they are still young. All future education costs, including application fee, examination fee, tuition fee, and the cost of living, need to be accounted for and adjusted for inflation. The way to go about this is to save and invest in an instrument where your returns are two-fold — first as capital appreciation and dividends and second as the increasing value of the currency itself. Consequently, you can mitigate these seemingly large prices by investing in the same currency, which in this case, is the US dollar. This is one of the main reasons why parents around the world are choosing to invest in the US equities market for the future of their children.

The average cost of college in the US has tripled in the last 20 years, currently at $35,720 per year, which is about Rs 27 lakh a year. If you, as a parent, want to have skin in the game and beat inflation, you need to think now about growing your nest egg. Your child should not have to compromise on their education because of external factors, especially when wise decisions made on time can help you as a family to take charge of their future.

It is only sensible to leverage the tremendous potential of the country’s growth in Big Tech, e-commerce, biotechnology, clean energy, infrastructure, and healthcare. The US has a lead in many of these sectors of the economy. You can you choose to own a part of those, and fund your child’s dreams.