Global funds could help with your child's higher education, but there's a catch

One data suggests that the cost of professional and technical education over the past decade has shot up over 100%. Another data is that families in which a child takes up higher education end up spending nearly 20% of their household expenses on this. “With the inflationary pressure, education may cost you a moon, going forward. Add to this the reality of online education, tuition costs, healthcare, insurance and sundry expenses, gadget costs, and you realize that handling these whopping expenses is no child’s play," said Vikas Singhania, chief executive officer (CEO), Tradesmart.

Usually, apart from tuition fees, expenses for travel, boarding and food are some of the major additions to the budget. However, you can avoid availing of an education loan and save on interest expenses later if you invest in higher education when the child is young.

One way to go about is creating a separate higher education savings fund for your children.

 

“It helps avoid spending the money you have accumulated for this purpose on other expenses. Moreover, you will have to choose the appropriate investment avenue and invest for the long term to accumulate the requisite corpus for children’s higher education," said Archit Gupta, founder and CEO, Clear.

Further, investments in global funds make sense if you are looking to send your kids abroad. As per experts, international funds allow you to diversify your portfolio across the globe. Moreover, investors stand to benefit as the developed markets such as the US may perform well when the Indian stock markets are down.

Another key benefit of global investment is currency diversification. “You get to hedge your investment against the depreciation in the Indian rupee. So, if the rupee weakens, the value of your investment in the fund increases," said Singhania. The global funds offer exposure to a foreign currency such as the US dollar by investing in rupees, and in turn, protect investments even when the Indian rupee falls against the US dollar.

However, keep in mind that central banks such as the Reserve Bank of India and the US Federal Reserve play an important role in maintaining currency levels and it is difficult to predict forex movements beyond a certain point.

Therefore, one must diversify investments across different asset classes and geographies.

“You must check the portfolio of the global fund to determine where it invests your money. For instance, global funds with exposure to stocks of giant firms and top global IT companies may do well over time. Moreover, you must check the performance of global funds against their benchmark and select those with a good track record of performance," said Gupta.

According to financial experts, avoid putting all your funds in just global funds. Instead, split your funds between domestic and global funds.

“The main advantage of investing in an overseas fund is currency fluctuation. However, if you look at the returns from the Nifty 50, India is expected to give much better returns compared to developed countries. Therefore, have only a portion of the portfolio meant for higher education abroad in international equity mainly to benefit from the currency diversification," said Melvin Joseph, a Sebi-registered investment adviser and founder of Finvin Financial Planners.

Investors must also keep taxation in mind before investing in global funds. The gains for a holding period of less than three years are treated as short-term capital gains and are taxed at the slab rate. The gains over a holding period of more than three years are treated as long-term gains and are taxed at the rate of 20% post indexation.

Moreover, financial advisers suggest having a maximum of 15% exposure to global funds in an investment portfolio.