Saving for Education Abroad — The Two Things That Make It Different

Most goals have some flexibility. A house purchase can wait a year, a wedding can be planned around circumstances. An admission cannot.

That removes the option every long-horizon investor quietly relies on, which is waiting for a poor stretch to pass. If the market is down in the month the first payment is due, that is simply the situation, and the household either pays from something else or borrows.

So the risk reduction has to happen before the date rather than in response to conditions near it. Money needed in the first year should be out of equity well before that year begins, and our page on asset allocation covers how that shift is done gradually.

The fee is set in the currency of the country, and you are saving in rupees. Those two things move independently of your investments.

That means the rupee amount you need is not fixed even if the fee is. A household can save exactly what it planned and still find the requirement has grown, for reasons entirely unconnected to any scheme it held.

There is a category of scheme investing outside India, described on our page on international funds, and it does carry a currency element. What it does not do is match a specific fee in a specific currency, and it brings its own uncertainties, so it is not a hedge in any precise sense. The honest position is that this variable exists and cannot be neatly eliminated, which is an argument for building in room rather than for a clever product.

Something in your favour, and it gets missed because people picture one enormous payment.

The spending is spread. A course runs over two, three or four years, with fees due each term and living costs monthly. So the entire amount is not needed on the first day, and the portion needed in year three still has three years to keep working.

That means the goal should be treated as several dated amounts rather than one. The first year and the deposit are near-term money and belong in something stable. The later years can stay invested longer, and a withdrawal arrangement can meet them as they fall due, as our page on the systematic withdrawal plan describes.

The tuition figure quoted in a brochure is the part everybody plans for. The rest is not small.

• Living costs, which over three or four years frequently exceed the tuition.
• Application costs before anybody is admitted anywhere, including tests and applications to several places.
• Travel, including visits home, which families underestimate every time.
• Proof of funds, where a visa process may require an amount to be visibly held and available, on a schedule that has nothing to do with when the fees are due.

That last one catches households out. Money that is technically available but sitting in equity, at a value that moves, is not the same as money that can be shown when required.

Most households funding education abroad end up using a combination rather than one or the other, and there is nothing wrong with that.

What we would avoid is the version where a household plans to fund the whole thing from investments, finds the amount short at the last moment, and takes a loan on whatever terms are available in a hurry. A loan considered in advance is a different arrangement from a loan arranged under pressure.

The specific terms, eligibility and whether borrowing suits your household are questions for a lender and, on the household side, for somebody who sees your full position. We are mutual fund distributors and we do not arrange loans or advise on them, and our page on SIP for child education covers the domestic version of this goal.

Plans made when a child is twelve frequently look different when they are seventeen, and this goal changes shape more often than most.

The child may decide against going, may be admitted somewhere considerably cheaper, may win funding that covers a large part of it, or may defer a year. None of those is a failure and all of them leave a household holding money earmarked for something that is no longer happening in that form.

Which is a good argument against locking it away. Money in an ordinary scheme held for this purpose can simply be redirected, becoming a contribution to a house, a business start, or long-horizon savings in the child own name. Money in something with a lock-in cannot, as our page on solution oriented funds discusses.

Households whose income arrives seasonally rather than monthly should plan this goal around their own cycle rather than a calendar month, which our page on SIP for farmers sets out.

The one thing to avoid is treating a changed plan as a windfall. A household that quietly absorbs the money into general spending has lost eight years of saving to a decision nobody actually made.

Five steps, and the first is the one that decides the rest.

• Write down the dates, not one date. Deposit, first year, each subsequent year.
• Treat anything under three years as near-term money from the outset, not later.
• Keep the long-dated portion invested, since a four-year course means later years still have a horizon.
• Reduce risk on a schedule, decided in advance rather than in response to the market.
• Build in room for currency movement and for the costs listed above, which is more useful than any product choice.

We will not tell you what a monthly amount becomes by the time your child is eighteen, and no calculator that does is telling you anything except the assumption somebody typed into it. What we will do is work out the dates and the split with you. Get in touch.