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Start saving and investing early if you want your child to study abroad

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Most upper-middle-class (and above) parents today regard a foreign degree as a passport to the good life for their child. Hence, educating her in a top-class foreign university is among the most important goals among upper middle class and affluent Indians. This Children’s Day, let us get into the nitty-gritty of what this goal will cost you and how you can go about achieving it.

Most popular destinations

While earlier the most popular destinations were the United States (US) and the United Kingdom (UK), today they have been supplanted by Canada. “In Canada, there is a high probability that after completing her course the student will get a work visa, then a permanent residency, and finally a citizenship. Both in the US and the UK, there is a high level of uncertainty nowadays in this regard,” says Neeraj Khanna, co-founder and director of Bengaluru-based Spark Career Mentors. While Canada is increasing its targets for attracting immigrants every year, both the US and the UK are reducing theirs.

An education in Canada is also about 30-35 per cent cheaper than in the US. The top universities and colleges in Canada, too, are highly regarded. The country is multi-racial and welcoming towards immigrants.

Next to Canada comes the US. It continues to be a much sought-after destination for postgraduate education, especially for the brightest kids – those who have the ability to get into Ivy League colleges. These students are confident that a top-notch company will hire them and obtain an H1B visa for them, or at least post them to their London or Singapore office, so that they don’t have to return to India. “The US continues to be a magnet because that is where the thought leadership exists—both in companies and in academia,” says Khanna.

Australia is also much sought after for a Master’s degree. It is less expensive than the US. The weather is attractive. Till a few years ago, it was easy to get a permanent residence in Australia. But over the past year and a half, this has become difficult as Australia, too, has made its criteria more stringent.

Most sought-after courses

Computer science is the most sought-after course on the engineering and tech side. “About three out of five students going abroad on the tech side want to study computer science because that is where the best jobs are. On the non-tech side, Finance is highly sought-after, followed by Economics,” says Khanna. In recent years, the number of people seeking a post-graduate degree in Medicine from abroad has also risen. The US is a magnet for these students as well.

How big a corpus you should aim for

Costs vary widely, since they depend on a variety of factors—the country, the ranking and brand value of the university, and so on. The table given along with this story gives an estimate of costs today.  

If your child is very young, you will have to take a ballpark figure and aim to achieve it, since you would not know the stream she will opt for. If the child is older, you will know the stream. This will make your task of arriving at the required corpus easier. Take the current cost and apply an inflation number to it for the years left. That should give you the target amount. “Using an inflation level of 6-7 per cent per annum to estimate future cost should suffice,” says Arnav Pandya, certified financial planner and founder, Moneyeduschool. He adds that the depreciation of the rupee against the harder currencies could cause your calculations to go awry, so you need to keep an eye on that as well.

Besides fixing a target amount, you need to evaluate it once each year. In case it changes more than your expectations, you may need to increase your saving and investment rate.

The portfolio you need to build

If the goal is 10-15 years away, begin with a pure equity portfolio. Once it is five-seven years away, move to a balanced portfolio. About a year or two before the targeted date, shift entirely into debt so that a downswing in the equity market does not spoil your plans. “In the equity portion of the portfolio, use equity mutual funds. On the debt side, use debt mutual fund categories like gilt funds, provided your goal is at least five years away, or PSU and banking funds. Long-term bonds from institutions and infrastructure companies may also be used. If you have a girl child, Sukanya Samriddhi Yojana is a good option for the debt portion of the portfolio,” says Pandya. On the equity side, parking some money in international funds (like US funds) will help you tackle exchange-rate risk.  

Mistakes you should avoid

A few children’s mutual funds are available. Most financial planners are of the view that you can manage with normal equity mutual funds instead of opting for such branded products. Many of these funds have small assets under management (AUM) and hence you may have to pay an unnecessarily high expense ratio in them. “These plans are only for people who lack the discipline to save regularly or those who may withdraw from that corpus for other purposes. Such labelled products may prevent such behaviour,” says Avinash Luthria, a Sebi-registered investment advisor and founder, Fiduciaries.   

Many child insurance plans are also available. Financial advisors say that they, too, may be avoided as they make pay-outs of specific sums at specific points of time. If your plans change, the inflexibility in pay-outs could cause problems. “Buy sufficient term insurance so that the portion of the goal not covered by the parents’ net worth gets covered by the insurance plan,” says Luthria.       

If parents cannot afford to pay the entire cost of international education, they should let the child take a loan or try to get a scholarship, even if it means going to a lower-ranked college. It should not happen that you overspend on an international education and then depend on your child to support you during your retirement.

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