Many Indian parents send their children abroad for higher studies. Quality education, international exposure, and lucrative jobs are some of the reasons behind such a decision. Data maintained by the ministry of home affairs on the arrival and departure of Indians show that the number of people who have disclosed their purpose of visit as study/education while going abroad has increased from 518,015 in 2018 to 750,365 in 2022. This is a 45% increase over five years.
The number of students (see graphic) going abroad for education is increasing daily. On the other hand, education costs are also increasing. Such costs include course fees and living expenses like hostel accommodation, food, travelling, etc. We must remember that all these expenses will only go north due to inflation.
Parents sending their children abroad need to consider not only the inflation in the country of their choice for education but also the exchange rate movement. Expenses will be incurred in foreign currencies such as dollar, pound sterling (GBP), euros, etc. To add, the rupee is depreciating against all these currencies.
The rupee depreciates 2- 4% annually against these currencies. Inflation and currency depreciation can make it difficult to arrange finances quickly, leading to students missing out on educational opportunities. To avoid this, parents should start preparing early.
But how should one prepare for these costs? The answer lies in investing in international equities.
It is crucial for parents to invest in assets that earn at least as much as the education inflation. You lose money if your investments earn less than inflation. To avoid this, parents should invest in assets that match or exceed education inflation, and equities have historically been the best option. Domestic equities may be enough for studying inland, but for studying abroad, there is a risk of insufficient funds due to uncertain exchange rates.
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To mitigate this risk, a basic rule in finance tells us to create an asset in the same currency in which we will repay our liability. This means if you wish to send your child to the US, then you should consider investing in dollar so that the exchange rate risk is automatically mitigated as your liability, i.e., the education costs to be paid, and the asset, viz. investments in dollars, are in the same currency. This can help you pay off the education costs through investments directly without worrying about the exchange rate.
Now the question remains: how much of the portfolio should be in international equities?
To find out how much you need to invest in international equities, you need to estimate how much you will have to incur in the future for education costs. You can estimate the future costs by compounding the costs that are required as of today by inflation. You need to compound for the period you have in your hand for the costs to be incurred. Once you estimate these costs, you can discount them to the present day using the rate of return international equities earn for you. This can be understood with the help of the following example:
Consider that you wish to send your child to the US for a course after five years. That course and other expenses require you to pay, let’s say, $10,000 as of today. So, considering education inflation of 4% in dollar terms, you will be required to pay $10,000 x (1+4%)5 = $12,166 after five years. Now you can discount the $12,166 as of today by using the rate of return in US equities. Assuming the expected rate of return of 10% per annum, you need to invest $7,555 {$12,166/(1+10%)5} as of today to pay the education expenses after five years from the investments itself.
It is wise to start planning early, and that, too, pragmatically. If you’re looking to send your child abroad, it is especially important to make sure your investments can match or surpass the rising costs of education. Parents should be aware of the impact that exchange rates can have on their savings and explore investment via international equities to stay ahead of education inflation while planning for education abroad.
Eela Dubey is co-founder of EduFund,an Ahmedabad-based Edtech firm