Study abroad planning with mutual funds: How much money you should invest in monthly SIP now

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Study abroad with mutual funds: Education is getting costly everywhere. If you want to send your child to study abroad in future, you may have to start saving and investing now to meet the rising costs. Depending on the country where you want to send your child for studies, the cost may vary from Rs 10 lakh to Rs 40 lakh annually. This is the current average cost, which is set to increase in the coming years due to inflation.

For example, if the average cost of foreign education is Rs 30 lakh/year now then it will go up to Rs 54 lakh/year in the next 10 years, assuming a 6% increase per year.

“The cost of studying abroad depends on the target country. Studying in the USA costs INR 30-40 lakhs annually for a postgraduate course. The same is INR 22-28 lakhs in the UK; INR 25-35 lakhs in Australia; INR16-20 lakhs in Canada; INR 11-15 lakhs in Germany,” said Ankit Mehra, CEO and Founder of GyanDhan, a digital education financing platform and NBFC.

“Taking the average cost of education at INR 30 lakhs and assuming the education rate at 6% (US inflation at 2% and currency depreciation at ~4.5%), the cost of abroad education in the next 5 years will be INR 40 lakhs. In the next 10 years, the cost of education will be approximately INR 54 lakhs,” he added.

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There are many options in which parents can invest their savings for their children’s education. However, investing in options like fixed deposits and other debt instruments will only help in keeping pace with inflation but not build a big corpus. If chosen carefully, after proper research and financial advice, equity mutual funds can help in arranging funds for the foreign education goal faster.

Experts say that equity as an asset class has proven to be a wealth generator over long periods of time with the expected returns far outpacing inflation.

How much monthly investment is required

Considering the figure of Rs 35 lakh per year for a 2-year PG course, the total amount needed in 10 years will grow to Rs 1.25 crore.

“If one invests in a 90%-10% equity: debt fund throughout the period, and assuming a 13.2% annualized return, one will have to invest Rs 50,000 a month to build the required corpus,” Mehra. He added that there are two things everyone needs to take into consideration when planning the SIP

  • Start early: If instead of today, one had started saving 2 years ago (i.e. 12 years of savings for a target study 10 years in the future), a monthly saving of Rs 35,5000 would be sufficient rather than the Rs 50,000 of monthly investments. 
  • Step-up investments: Individuals expect to get a salary increase every year. Assuming one can increase their savings considerably and deploy those savings in a step-up SIP investment where the total investment increases by 10% every year, the monthly requirement at the start would be Rs 37,000. 

Combine 1 and 2 above, and the initial monthly requirement goes down to Rs 24,5000.

How to invest for foreign education goal

You may need a balanced portfolio mix that meets your goal.

“The right portfolio mix for your savings is 90:10 equity:debt in the early years. As one comes closer to the time when funds will be needed, say 2-3 years prior to the need for funds, one can start shifting the funds to a debt-heavy portfolio to reduce volatility,” he said.

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“For equity investments, one should prefer investing in low-cost index funds. Many funds track the NIFTY-50 index like the UTI NIFTY 50 Index Fund or the HDFC Index Fund – NIFTY 50 plan. For debt investments, one can similarly choose between long-duration funds, liquid funds, or credit risk funds. Given that debt investment is supposed to reduce volatility, the recommendation would be to invest in funds that primarily invest in government securities,” he added.

Disclaimer: The views and recommendations made above are those of individual analysts, and not of Mutual Funds are subject to market risks. Please consult your financial advisor before making any investment decision.

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