Accumulating education corpus in dollar-denominated assets to pay for tuition and living expenses for study abroad offers several advantages.
By Mr. Viraj Nanda, CEO, Globalise
Studying abroad, especially in the US, is no longer just an aspiration but an achievable goal for many Indians. The Liberalized Remittance Scheme (LRS) has also made it easier to transfer large amounts abroad to pay for education. Accumulating funds in India and eventually sending them abroad to pay for tuition and living expenses has been the typical route for funding a child’s education. However, accumulating this corpus in dollar-denominated assets offers several advantages:
1. It benefits from exposure to a large, developed, and robust market.
2. Investing in the US provides diversification by spreading across assets that are less correlated with the domestic market.
3. Holding money in dollars eliminates the exchange rate risk and any depreciation of the rupee against the dollar.
Let us take the example of Family A planning for their child’s education abroad after eight years. This plan involves saving and investing to reach the target amount and planning the transfer of the funds eventually. Spreading part or all the savings towards this purpose into the US market would provide diversification benefits and mitigate exchange rate risk.
The US market historically has been less volatile on average compared to emerging markets such as India. The returns have also been superior in the last decade. As we know, the final amount a person would be able to send abroad is dependent on the prevailing exchange rates at the time of fund transfer. So, exchange rate fluctuations can significantly impact a corpus accumulated over a long period when it is time to transfer the funds.
On the other hand, a corpus accumulated in the US has no exposure to this exchange rate risk since funds are being accumulated in dollars for dollar-based expenses. The benefits accrue not just for long-term investment goals. It is equally beneficial to invest in the US for short-term targets as well.
Let us take another example, in this case, a much shorter horizon. Mr. B has a child who has secured admission to a US university and must fund the expenses for the next three years. In this case, assuming a corpus has already been accumulated in India, the amount is exposed to both the short-term interest rates and short-term market risk in the domestic market. It carries the exchange rate risk as well.
In contrast, a corpus in the US that is invested primarily in safe securities keeps the capital safe and avoids the risk from short-term exchange rate fluctuation.
Thus, we see that an investor in the US market can leverage the investments to fund multiple endeavours, higher education being one of them.