With the fall of the rupee, Indian students may have to plan better, pick up extra loans or maybe even give up their dream of studying abroad. However, Nasser Salim, managing partner at investment services firm Flexi Capital, believes that if parents plan early and in the right way, sending their children abroad for higher studies may not be a big hassle, even in situations such as the depreciation of the rupee.
From foreign investments to soft loans, Nasser Salim explains why it is important to plan early:
Deeksha Teri: What can students do if they are planning to go abroad for higher studies in the next two to five years?
Nasser: This is a very pertinent question. We have been in discussion with multiple clients that we manage and look after in terms of financial needs, and the most common question is how do we raise wealth? Most parents who have not planned end up selling a very important asset such as some ancestral property, jewellery, etc, or they look at loans and already burden themselves and their children.
Now, for international education, I believe it is not in the best interest of the clients and the students (to plan so late). If you do something that is unplanned, you end up with accidents, and this is the kind of accident we wish to avoid. That is what we advise investors and parents, especially in this case, because they have the ability to think through what they need to do. One big question to ask first and foremost is: have you planned for your children’s education and how soon is that plan going to be executed?
It is not for the child to decide, it is the parents’ savings and their ability to raise money for the child. Therefore, this question is more pertinent to parents, and especially young parents. When the children are 14-15 years of age, the time horizon is only three-four years for them to go for higher education. Post-graduation is still nine years away possibly, but graduation is just three years away at 15. So, the need to raise that question early is very important.
I am laying so much stress on this because we have to go back. Decide when you are young parents. Have you thought of sending your child abroad and, if you have, have you planned for it? Are you having these relevant discussions?
Therefore, my foremost point is, when you are young parents, start planning for your children and their future. If you do that, you will have a sufficient time horizon, and when I say time horizon, it is time value as a factor of money. It is a very important part of anyone’s financial plan or financial end objectives. We are of the opinion that you must start as soon as the child is born, even if it is small savings, it can start going in and with a plan in place.
Deeksha: But for instance, if a child tells his/her parents in Class 9 or 10 that he/she would like to go abroad to pursue an undergraduate degree, then what can the parents do to alleviate the impact of rupee depreciation?
Nasser: So there are two parts to this — the first part is, if you look at somebody who has got four-five years of journey left, so someone who is in Class 9 possibly has about three years until they reach class 12. So, somebody who’s age 14, possibly has about three-four years. If they come to parents and say they are keen to go abroad, the immediate objective is that you must beat these things in this case:
*Dollar inflation, which is at what rate the dollar has appreciated against the INR over the last 25-30 years.
*Inflation-adjusted growth rate as far as India is concerned.
When I combine these two, it will tell you what is the rate of return that is required to be generated for the amount that you need to raise in three-four years, or depending on the age of the child. Therefore, there is the opportunity to deploy money every year, every month or every three or six months.
The second part is, people who already have savings can look at some very interesting, dollar-based funds which are available through many such platforms. So, one of them, for example, is (and they can speak to their advisors and distributors in this case) there is an Alt Fund (Alternative Mutual Fund) platform which basically tells you what funds are available in dollar denominations. I am saying dollar because you would have taken this chunk of money, you have that capital available, and you want to make sure the capital does not get eroded on account of dollar inflation. Therefore, you can speak to your advisors, and have a clear discussion depending on your time horizon and your objectives of generating those returns.
You can invest in various options available, which is today available under the LRS (Liberalised Remittance Scheme) route. Investors can send money through this route, up to $250,000, and invest it in USD. So from the USD perspective, depreciation of the INR does not affect them much.
The other is when you come back to the first part where we wish to create that plan so that dollar inflation gets beaten. Again, for them, international funds are available, and one can easily look at those options for investing.
I can tell you a few platforms which give clients the ability to choose what kind of funds and from where they can choose today. There is a platform available for Britain investors to talk to them and reach out for your prospective parking in dollar denomination. There is a group called the AllFunds group, which has over 1.2 trillion assets under advisory and this platform uses a very secure transactional process. So this is a platform where your distributors, advisors can go, take the money, they will give you a backward number. There are two parts — firstly, you need returns which will beat dollar inflation and domestic inflation to ensure that the money goes in every month, every quarter through an SIP or every six months/year. This will be done based on the objective to create the funds.
The second, of course, is you have lump sum money available in Indian rupees, and you want to ensure that you convert it to dollar terms (you can do that through the same platform, and you get a basket of options to choose from, depending on the risk horizon and depending on the objective of the funds required in USD to be generated for your child’s education under the LRS route.
Nasser: LRS is basically governed and regulated by the Reserve Bank of India (RBI). According to the RBI, LRS stands for Liberalised Remittance Scheme. The RBI has given permission for Indian residents: all resident individuals, including minors, are allowed to freely remit up to $250,000 — at 80 rupees a dollar for simple calculation purposes, it roughly is about Rs 2.2 crore. Up to that much can be transferred freely for any permissible current or capital account transaction or a combination of both.
Now, this limit of $250,000 has been changed multiple times, unfortunately. Earlier it was one lakh fifty, then it became 200 thousand, now it is 250 thousand. However, there is no restriction on the frequency of transactions. You can transfer up to 250 thousand dollars multiple times in a year. As long as your limit remains under this, you can transfer this amount through your banking channels only, not cash.
So coming back to your original question, if someone who is 14-15 years of age, tells their parents they want to study overseas, in that case they must engage with their advisors, distributors and financial planners, to ask them to suggest to you options where you can choose to invest in the international funds through LRS, which has a permissible limit. And also discuss platforms for these transactions, for example, the platform that we, at FlexiCapital use, is the AllFunds platform. Because once money goes there, in the international market, we also have to ensure it generates funds.
Nasser: In terms of alternatives, one is if they do not wish for international exposure at this stage, they plan for domestic funds which beats three factors (coming back to my first point). Every year, we see dollar inflation of about 3-5 per cent, so your return must grow. If you do not wish to send money abroad, even if you are investing domestically, you need to make sure you beat that 3-5 per cent range of dollar inflation, plus inflation in India.
So, your return has to beat three main things — dollar inflation, domestic inflation which has been about 6 per cent historically, and GDP, which is typically 6.5 per cent to 7 per cent. So ideally, for all your investments, you should try to get at least 15 per cent plus returns and that is the discussion you need to have with your advisors to protect yourselves from any major shock. You have to ensure your financial planner benchmarks this return and you should ask them this question that it should be done against these three returns. So collectively, you should go beyond 15 per cent ideally, as a target. However, there is no guarantee or promise as this is the function of taking risk and returns.
What we have to understand is, and what is important from the parents’ perspective is – the industry in which the child is going, how soon they will be able to break free from the loan. So, depending on the loan, the sector, the growth opportunities of the sector, the starting salary, both the parent and student should make a decision. There should be no hasty decision or peer pressure.
For example, the child ends up paying 6 per cent interest rate on a dollar education loan per annum, but the industry growth is sub 6 per cent. This means the interest rate of the loan remains higher than the industry growth rate. Obviously, your child will take a longer time to break away from the shackles of debt. This is a very important fundamental question that needs to be asked.
Deeksha: For students who are self-financing and do not wish to take money from their parents, what can they do?
Nasser: Wherever the children are looking at self-funding, they need to understand the prospects of the industry. Also, they must get at least two-three different quotes from various banks. They also have to find out whether they can seek part-time employment opportunities while they are studying. You can speak to your bank and ask them if you can start paying off a certain part of the loan while you are studying.
So internationally, you can ask your immigration officers if you can do part-time work assignments and generate money, according to the legal norms allowed. Students should consider these things while choosing the loan and additions around the loan that they can pay from these earnings.
Barring the other important ones we discussed, obviously, you must check interest rates and it should be a comparative interest rate. There are certain banks which give you soft loans, they can offer some better features so negotiate hard with them.
If you have very good grades in the past, you can negotiate a better rate of interest because you can tell them you are the Trojan horse that they are betting on as a banker. Also, speak to your education institutes which are part of the system internationally, they may give you soft loans depending on your score and interviews. They also have certain tie-ups and scholarships, so please explore all these options.
Deeksha: Is it true that in such depreciation cases, the situation is worse for students who are planning to go to the US, rather than countries in the EU or Asia?
Nasser: Unfortunately, the dollar will continue to appreciate faster than the other currencies. So yes, from a US dollar perspective, you will be more hit. Over the next few years, the dollar will continue to appreciate against the INR, so from that perspective, if you are taking pure dollar expenses in dollar currencies, you may get hit harder, compared to other currencies.
Courtesy : The Indian Express