Many Indians today aspire to educate themselves or their children abroad. There is no requirement to be exceptionally intelligent or rich to get one's child a college admission in a foreign university. A recent study suggests that the number of Indian students enrolling themselves in top seven college destinations abroad has doubled in the past decade. Here are some saving strategies that you can use to fund your child's education in the college of their choice.
How much do you need to save to study abroad?
At present, a three-year course costs Rs 30 to 35 lakhs on an average in American Universities. The amount can further vary based on the choice of country and type of course.
When you start planning for the education, one needs to factor in inflation, depreciation in the rupee and the number of years left for building the corpus. The Indian rupee that has crossed the 71-mark against the US dollar and it can further pressurize one's savings while planning an education abroad.
Apart from the tuition fees, you also have to consider the cost of living in these countries as it is much higher than in India.
Once you have a rough idea of the cost of the course and the number of years left for planning, you can design a map for your investments accordingly.
Just starting saving early will not help. It is important to pick the right instruments of investment so that your money works for you. The major determinant of asset allocation will be the number of years left for your child to start the course.
15 years or more
You can put the maximum permissible amount in the Public Provident Fund (PPF), which has a maturity period of 15 years.
If your daughter is below 10 years of age, you can open a Sukanya Samriddhi Yojana account as it offers 8.1 percent returns, which is the highest among all the small savings scheme in India, including PPF.
Additionally, both SSY and PPF withdrawals are completely tax-free on maturity.
In the case of SSY, the maturity amount can be withdrawn when your girl child turns 21. The beneficiary girl child can also make partial withdrawals from the scheme for her education on turning 18.
5 to 10 years
If you have 8 to 10 years left, equity mutual funds can be the preferred. You cannot rely on safe and slow-growing savings schemes to generate great returns in shorter periods.
Complete exposure to equity until five years from the goal can prove to be fruitful, if you have a high-risk appetite. Start a SIP with a combination of multi-cap funds and mid-cap schemes, but make sure to review the fund performance at least twice a year.
More importantly, consider inflation in making your deposits, which means you should increase monthly investments by at least 5 percent every year as your income grows.
It is important to note that even if equity investments can earn high returns which could be greater than 15 percent, they also hold higher risks, which is why they are good for a horizon of over five years only.
When your goal is just 5 years away, you should start gradually withdrawing the amount to invest in safer instruments like short-term debt funds and fixed deposits.
You can choose bonds with 2 to 3 years maturity period as these offer returns that are roughly equal to the prevailing bond yields and also have lower tax implications than fixed deposits if held for over three years.
It is important to protect the capital accumulation that took a significant amount of years.
Less than five years
Equity investments for 2 to 3 years can expose your money to great risks. This is because the market is highly volatile in short periods and you may end up losing money instead.
If you do not have considerable savings, an education loan is advisable. This is because a loan is better than draining your retirement savings for your child. Education loans from certain state government schemes can also be availed that attract lesser interest rate. Additionally, these loans are eligible for tax benefits.