/ 23 June 2010

Saving for education

Where should I invest for my children's education?

Feizal asks: I have two daughters, both under four years, and I am looking for an educational and unit trust policy for them. I have a lump sum and will be able to contribute on a monthly basis as well.

Maya replies: The first thing you need to determine is your time frame — is this for primary, secondary or tertiary education? This will determine the best investment strategy.

Primary: If you need to access the savings within the next five years, consider a lower-risk fund with more exposure to bonds and cash. A fund that aims to beat inflation by 2% to 3% would be a good start. A dedicated educational policy could also be a good option if it provides some guarantees should the market corrects just as you need the money. Most of the large life insurance companies offer such policies, but make sure you understand the costs (see below).

Secondary: You have 10 years before you need these funds so you could invest in an equity unit trust or an exchange-traded fund. Closer to the time that you will need the funds you can switch to a lower-risk fund within the same stable, which will protect the capital as you draw down on it to meet the school fees. Consider investing in successful unit trust companies that do not charge upfront fees like Allan Gray, Coronation and Investec, for example. Alternatively, an exchange-traded fund such as Satrix RAFI is a good alternative as the monthly debit orders are lower

Read: The ETF vs unit trust debate

These types of investment would also be ideal for your daughters’ longer-term savings.

Tertiary education: The best fund by far is Fundisa. This is a joint initiative by the government and the unit trust industry. If you invest up to R200 per month per child, the government tops up your savings by 25% — no other investment can guarantee you that type of return. Visit: http://www.asisa.org.za/fundisa. Please note that www.fundisa.co.za is NOT the correct website.

Education policies — what to consider
There are various products that target savings for children’s education, but you need to weigh up the benefits with the costs. Sometimes it is more cost effective to invest in a normal unit trust than an educational policy.
Death benefit: Some policies may include a death benefit that will pay out for your children’s education if you pass away. Ask the financial adviser to first calculate what standalone life cover would cost so you fully understand what portion of the fees are going to premiums.
Guarantees: Some policies offer a minimum return or capital protection. These types of guarantees come at a price, but if you want peace of mind it may be a cost worth paying.

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