14 Sep 2015 17:37 IST

Higher studies can improve investment grades

Your newly acquired skills can enhance your ability to generate income

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! Here, we discuss why advanced education impacts your investments and the factors you should consider before deciding to enroll for higher studies.

Investment and income

Human capital refers to the present value of all your future incomes. When you decide to enroll for a graduate-level programme, you are doing so to enhance your human capital.

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

An increase in human capital can increase investment capital as long as your income increases at a rate higher than that of your current consumption. Your newly acquired skills through higher education can increase your income. And this could increase your investment capital.

Also, your human and investment capital are linked in two other important ways — 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.

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. If your advanced education is in a niche domain related to a cyclical industry, it could increase the volatility of your human capital.

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?

If your short-term goal is high priority, defer enrolling for the graduate-level programme till you achieve the goal. This is provided you intend taking a student loan to fund your education. You should enroll 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.

Broadly, analyse if the advanced degree will enhance your human capital. Do not enroll because everyone is doing so! Your objectives and limitations could be different from theirs.

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

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