Tuesday, Jul 05, 2022

How Much Do You Need To Save For An MBA Course?

A debt mutual fund is the best way to arrange the cost of doing an MBA after three to five years. Although, one can also save partially and go for an education loan for the remaining cost.

Pursuing MBA from a good college is a dream for many students but funding the course may become a challenge because of soaring costs. However, saving in a disciplined and time-bound manner can help you overcome the challenge of saving for your own or your child’s MBA course.

It goes without saying that the earlier you start saving, the easier it will be to build a corpus. If you are a parent, you should start saving for your child’s education (to fund an MBA or any other course) as early as possible. Read more here to understand how you can go about it.

However, if you are not an early bird or are someone who wants to pursue MBA after a few years of work experience, you better start saving now. We did some calculations to figure out how much you will need to save if you are left with a timeline of one, three or five years.

The modes of investment will depend on the timeline you have chosen. “Ideally, the investments should be in debt mutual funds if the goal is less than five years away. But if the goal duration is not fixed (like the child may delay it for another two or three years after completing graduation and the goal may stretch up to seven or eight years), 20-30 per cent of the investments can be made in equity instruments,” says Melvin Joseph, an investment adviser registered with the Securities and Exchange Board of India (Sebi) and managing partner, Finvin Financial Planners, a financial planning firm.

On return expectation, he clarifies that 5-6 per cent returns may be expected from debt investments, 10 per cent from equity instruments, and about 9 per cent from a 50:50 mix of equity and debt products.

How Much Do You Need To Save Over Five Years?

If your child is in Class X or XI or you plan to work for a few years before doing an MBA course, you will roughly have a time frame of five years.

In India, MBA courses roughly cost between Rs 10 lakh and Rs 30 lakh. For the sake of calculation, let’s assume you are looking at an MBA course that costs Rs 20 lakh. Let’s assume an average return rate of 6 per cent.

If you are starting on a clean slate and have no saving whatsoever, you will need to save Rs29,000 every month for five years. In case you have a saving of, say, Rs 5 lakh, the monthly saving amount will go down to Rs18,000. Increase the pre-savings to Rs 10 lakh, and the amount will reduce to Rs12,000 per month.

If a lower monthly amount suits your budget and cash flow, but you do not have savings of your own, you could consider taking an education loan and saving up the rest. Education loans can help inculcate financial discipline in the aspirants as they can repay the EMIs instead of the parents, says Joseph.

How Much Do You Need To Save Over Three Years?

You would have a three-year time frame when your child is just out of school and enrolling for a three-year graduation course. The lower the time frame, the higher would the monthly saving amount need to be.

Assuming the same goal of Rs 20 lakh at 6 per cent return rate, you would have to save Rs 51,000 per month in case you have no savings of your own. If you have Rs 5 lakh pre-savings or education loan, and plan to save the rest, you will need to save Rs 35,000 per month for the next three years. The monthly amount will go down to Rs 23,000 if you already have Rs 10 lakh, and so on.

Joseph suggests that people with a three-year timeline should invest in debt and liquid mutual funds as they are safer than other funds and more tax-efficient than fixed deposits (FDs) and recurring deposits (RDs).

How Much Do You Need To Save Over A Year?

This may be too short a time frame for most retail investors to save a huge amount. The best-case scenario here would be to take an education loan to fund a large part of the MBA course cost.

“If the MBA goal is just a year away, the person should invest only in recurring deposits (RDs) or fixed deposits (FDs),” says Joseph.

It is advisable to cover a large part of the cost through an education loan if you have no savings, unless you are able to save a huge amount every month. Though FDs are giving a return in the range of 5 per cent currently, we have assumed a 6 per cent rate of return (for the sake of comparison with other tenures) to reach the corpus of Rs 20 lakh. If there are no savings, you will have to shell out Rs 1.56 lakhs every month, which may be quite a steep amount for many investors. If you add an education loan of Rs 10 lakh, the monthly saving amount will reduce to Rs 78,000. An education loan of Rs 15 lakh will reduce the monthly burden to Rs 40,000.

 If you are able to save a large amount per month, do a cost benefit analysis before taking the loan.

It is quite clear from the calculations above that the earlier you start saving, the easier it will be to save in a disciplined manner without putting too much pressure on your cash flow.