Investing to create your child’s overseas studies corpus? Start early to beat 11-12% education inflation | Simply Save

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A common piece of advice from financial planners is that it is best to start investing to create an education kitty for your child the moment she is born.

This is thanks to the humungous corpus that higher studies, particularly in popular destinations such as the US, UK, Australia and Canada entail. While fee structures at top universities and associated expenses may seem daunting, investing regularly through the SIP route in equity mutual funds will make parents’ task easier.

They can can also consider investing in emerging avenues such as direct investments in overseas equities to take care of the exchange rate risk.  Likewise, they can invest in international mutual funds offered by Indian asset management companies.

To discuss various options that parents intending to create a large enough corpus for their kids’ overseas education should consider, Moneycontrol spoke to Eela Dubey, Co-founder of Edufund, an advisory firm that provides education and loan counselling besides advice on investing for children’s education overseas. Here are the key takeaways.

-          Education inflation in rupee terms is 11-12 percent per annum. This implies that the cost of education doubles in every six years.

-          To make sure they effectively account for this inflation by generation real returns, parents with young kids should start investing as soon as possible.

-          Ideally, they should start investing immediately after their children are born. This will ensure that the outflow towards such a corpus puts minimal strain on their finances.

-          For instance, say, the cost of a Master’s programme that you would want your child to pursue costs Rs 25 lakh. After 21 years, thanks to education inflation, the cost would have potentially grown to close to Rs 1.85 crore.

-          If you were to start investing the moment your child is born, you would need to invest Rs 9,000 a month for 21 years to achieve this goal.

-          But if you were to delay your investment journey even by five years, you will have to invest Rs 21,000 a month to create the same corpus (by the time the child turns 21). So, you can see the staggering difference seemingly minor delays can lead to.

-          Parents should start by carrying out research to estimate the cost of overseas education in the country they might want to send their kid to, course specialisations, the study duration – 12 months, 18 months or 24 months and so on.

-          You need to bear in mind that overseas education is not just about tuition fees that universities charge. You need a much bigger corpus to account for the ancillary costs – accommodation, living expenses, insurance premiums, books, projects etc. All these factors have to be looked at holistically.

-          If your child’s education goal is over 15 years away, invest in equities as they offer higher returns compared to other asset classes, and can beat education inflation.

-          For common individuals, mutual funds, rather than direct stocks, offer an attractive route to investing in equities. They offer diversification, reduce concentration of risk. It is a wise choice to start with. Direct equities are for more financially mature individuals.

-          Ensure that you keep your risk appetite in mind, besides the investment horizon and study duration.

-          Investing in international equities offers not only geography-wise diversification but can also act as hedge against rupee depreciation. You should especially factor this in if you want your kids to study in the US or UK.

-          Since you would be earning in rupees but spending in dollars, investing in foreign equities would be more appropriate. You can look at direct overseas equities and ETFs (exchange traded funds). Do ensure that you consider the tax angle too.

-          Finally, invest such that your corpus covers at least 65-70 percent of international education cost. Be pragmatic. If there is a shortfall, there are a number of education financing options available today.