Personal Finance

Higher studies can improve investment grades

B Venkatesh | Updated on January 22, 2018

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You may be planning to enroll for an advanced education programme next year. Or, perhaps, you are a parent whose son or daughter is planning to do the above. Remember, enrolling for any graduate-level degree can impact your investment portfolio! In this article, we discuss why advanced education impacts your investments and the factors you should consider before taking the decision to enrol for higher studies.

Investment and income

Human capital refers to the present value of all your future income. When you decide to enrol for a graduate-level programme, you are doing so to enhance your human capital or increase the present value of your future income. Why will advanced education affect your investment portfolio?

You have two assets — human capital and investment capital. During your working life, you save from your current income to create an investment capital. You then use that to accumulate wealth to meet your life goals. So, your human capital and investment capital are related.

An increase in human capital can increase investment capital as long as your income increases at a rate that is higher than the rate of your current consumption.

Now, acquiring an advanced degree can enhance your human capital. How? Your newly acquired skills through higher education can increase your income. And this could, in turn, increase your investment capital.

Also, your human capital and investment capital are linked in two other important ways — your student loan and the risk you can take on your investment portfolio.

If you take a student loan to fund your graduate-level programme, your savings during the initial part of your career will be used to repay the loan. It means that you cannot aggressively pursue short-term goals, such as making down payment for a house or meeting marriage expenses for self or a sibling.

More generally, the risk you take on your investments is closely related to your human capital. If your human capital is unstable, your investment should be in stable-income products. On the other hand, if it is stable, you may choose to invest in high-risk investments. The reason is simple.

Given that you have only two assets, the uncertainty associated with one asset has to be balanced with stability in the other. If your advanced education is in a niche domain related to a cyclical industry, you could be increasing the volatility of your human capital. Why?

For one, you could lose your job due to cyclicality of the industry. For another, you may find it difficult to get another job because of niche domain expertise.

Loan or goal?

What should you consider before you take a decision to enhance your human capital? If your short-term goal is high priority, defer enrolling for the graduate-level programme till you achieve your goal.

This is provided you intend taking a student loan to fund your education; a goal is high priority only if it cannot be postponed. You should enrol for the programme if you can fund your education through savings or your short-term goal can be postponed or if your parents can fund your education.

At a broader level, carefully analyse to see if the advanced degree you plan to pursue will enhance your human capital. Remember, your decision to acquire a higher qualification should complement your investment portfolio. Also, consider the emotional costs of the outstanding student loan in the near term. In other words, do not enrol for a graduate-level programme because everyone you know is doing so! Your investment portfolio will be different from theirs. So, will be your need to enhance your human capital.

The writer is the founder of Navera Consulting. Send your queries to portfolioideas@thehindu.co.in

Published on September 13, 2015

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