More than 750,000 students from India went abroad to study in 2022. While loans are an option to fund this education, parents typically end up either partially or fully funding their child’s education. A four-year undergraduate degree today can cost anywhere between ₹80 lakh and ₹2.5 crore, while a two-year master’s degree ranges from ₹50 lakh to ₹1.5 crore. Funding this education is a major expense for any parent.
When saving towards this education goal, often parents overlook two key things. The first is the impact of inflation on the cost of education. A typical calculation for a parent works like this – my daughter is 5 years old today and she will go abroad in another 10 years. The fees that universities are charging today is ₹1 crore, I have saved ₹25 lakh already, so I need to earn about 17% returns per annum to hit my ₹1 crore goal. However, the ₹1 crore fee today is not going to stay the same after 10 years. In rupee terms, the cost of a US education has increased by 11.4% per year on average over the last 40 years. This means that if the course costs ₹1 crore today, your goal should be to save around ₹2.5 crore after taking inflation into consideration.
Although, you may be wondering that 11.4% annual inflation seems very high. This brings me to the other piece that gets overlooked: the rupee’s depreciation against the dollar. If you look at the annual inflation of US education in dollar terms, it’s only 5.7%, but because the rupee has historically depreciated about 3-4% per year against the dollar, the rupee inflation tends to be much higher. So, if you save towards a foreign education directly in dollars, you would need to save less. Now, until about 5 years ago it was unthinkable for an Indian to save in dollars, but now due to technology, it is possible for Indian parents to build dollar portfolios by investing in the US markets. From a regulatory perspective, an Indian resident can remit up to $250,000 per year under the RBI’s Liberalized Remittance Scheme for various purposes including investing in foreign markets.
The next question then is, what strategy should one use in the US markets when investing for a foreign education goal. A simple asset allocation approach should suffice for most parents. You can create a portfolio of four asset classes—equity, debt, commodities and gold. Equity helps you benefit from growth in the economy, debt generates fixed income and both commodities and gold help tackle inflation. All these four asset classes can be easily purchased via ETFs in the US markets. For example, for equities, you could consider IVV (US stock market) or VT (global stock market) or for debt, you can explore IEF (US Treasury bonds). Invesco’s PCQ ETF provides a broad exposure to commodities while iShares’ IAU provides gold exposure.
You can start with maximum exposure to equity (above 70%) and then eventually transition towards a 100% debt portfolio as you get closer to the year in which your child will go abroad. Commodities and gold should not be more than 10-15% of the portfolio throughout the entire time horizon.
Viram Shah is co-founder & CEO, Vested Finance
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Updated: 15 Oct 2023, 10:32 PM IST