How Parents Can Leverage Their US Market Wallet To Study Their Children’s Dreams Abroad
By Mr. Viraj Nanda, CEO, Globalize
Studying abroad, especially in the United States, is no longer just an aspiration but an achievable goal for many Indians. The liberalized transfer system (LRS) has also made it easier to transfer large amounts abroad to pay for studies. Accumulating funds in India and possibly sending them abroad to pay for tuition and living expenses has been the typical route to finance a child’s education. However, accumulating this corpus of dollar-denominated assets offers several advantages:
1. It enjoys exposure to a large, developed and robust market.
2. Investing in the United States offers diversification by allocating assets that are less correlated to the domestic market.
3. Holding money in dollars eliminates currency risk and any depreciation of the rupee against the dollar.
Take the example of family A who plans their child’s education abroad after eight years. This plan involves saving and investing to reach the target amount and possibly planning the transfer of funds. Allocating some or all of the savings for this purpose in the US market would offer diversification benefits and mitigate currency risk.
The US market has historically been less volatile on average compared to emerging markets such as India. Yields have also been higher over the past decade. As we know, the final amount that a person could send abroad depends on the exchange rates in effect at the time of the funds transfer. Thus, fluctuations in exchange rates can significantly impact a corpus accumulated over a long period when it is time to transfer funds.
In contrast, a corpus accumulated in the United States is not exposed to this currency risk since funds are accumulated in dollars for expenditure in dollars. The benefits don’t accrue just for long-term investment goals. It is also beneficial to invest in the United States for short-term goals.
Key factors to consider when planning funding for your child’s higher education abroad
Let’s take another example, in this case a much shorter time horizon. Mr. B has a child who has been admitted to an American university and must finance the expenses for the next three years. In this case, assuming that a corpus has already been accumulated in India, the amount is exposed to both short-term interest rates and short-term market risk in the domestic market. It also bears the currency risk.
In contrast, a US corpus invested primarily in safe securities preserves capital and avoids the risk of short-term exchange rate fluctuations.
So, we see that an investor in the US market can leverage investments to fund multiple efforts, higher education being one of them.