Clever in­vest­ing in your child’s name

Finweek English Edition - - INSIDE - BY KRISTIA VAN HEER­DEN kris­tiav@fin­week.co.za

If you can’t save to save your life, you should prob­a­bly blame your par­ents. Man­ag­ing money is easy enough for chil­dren to un­der­stand, yet very few par­ents know how to teach ba­sic in­vest­ment prin­ci­ples be­cause very few un­der­stand it them­selves. A hand-to-mouth ap­proach to money can be­come an in­ter­gen­er­a­tional curse, which is why we pro­pose you break it. En­ter in­dexed unit trusts – easy enough for first-time in­vestors and chil­dren to un­der­stand. DO IT FOR THE CHIL­DREN Adults can make third-party in­vest­ments on be­half of a mi­nor through plat­forms like et­fSA.co.za and Sa­trix. By buy­ing in­dex track­ing prod­ucts like in­dexed unit trusts or ETFs, par­ents can squir­rel away as lit­tle as R300 per month in their child’s name and use the op­por­tu­nity to teach chil­dren how to in­vest.

“I like the idea of us­ing an ETF to teach chil­dren about in­vest­ments,” says fi­nan­cial ad­viser, wealth man­ager and au­thor War­ren In­gram. “By the time your child reaches high school you can start teach­ing them about the con­stituents of the in­vest­ment. You can see the names of the un­der­ly­ing com­pa­nies in­side the ETFs. When you’re driv­ing around, you can teach them that they own a bit of each com­pany. It gives them a chance to un­der­stand that it’s not just pieces of paper but real busi­ness,” he says.

In ad­di­tion to il­lus­trat­ing fun­da­men­tals of in­vest­ment, in­vest­ing with your child also helps to il­lus­trate the more com­mon in­vest­ment traps adults so of­ten fall into. In­gram says a drop in the stock mar­ket is the per­fect op­por­tu­nity to show your child how the in­vest­ment is af­fected. You can teach them why it’s im­por­tant to stay in­vested dur­ing a stock-mar­ket drop, why they don’t need to panic and how an in­vest­ment can grow de­spite the set­back. HOW MUCH SHOULD YOU IN­VEST? On both et­fSA.co.za and Sa­trix, you can in­vest a min­i­mum of R300 per month or make a min­i­mum lump sum con­tri­bu­tion of R1 000 per in­vest­ment. Per­haps it’s worth en­cour­ag­ing your child to save by con­tribut­ing one rand for each rand they save but the de­tails are up to you. WHAT SHOULD YOU BUY? In­gram says eq­uity is your best bet when in­vest­ing on be­half of a mi­nor be­cause shares re­main the best per­form­ing as­sets over a pe­riod. “You should only be go­ing into pure eq­uity ETFs, not bal­anced ETFs or com­modi­ties. Rather have a di­ver­si­fied port­fo­lio than a spe­cific view.” THE TAX IM­PLI­CA­TIONS The good news is that you won’t be taxed on in­vest­ing on be­half of a mi­nor, pro­vid­ing the in­vest­ment is in the name of the child and your con­tri­bu­tions re­main un­der R100 000 per year. A WORD OF CAU­TION “The most ob­vi­ous pit­fall with this type of in­vest­ment is that once the child turns 18, she has the right to ac­cess that in­vest­ment. She is legally en­ti­tled to sign for it. You have no le­gal rights. Be pre­pared to ed­u­cate your child in the 10 years leading up to her 18th birth­day not to cash it straight away,” he says.

For­tu­nately, you can also start a re­tire­ment an­nu­ity (RA) on be­half of your child, which she’ll be able to ac­cess once she’s 55. In­gram says that the big­gest ben­e­fit to in­vest­ing in an RA on be­half of your child is all of the growth in­side the RA is tax fee, but ad­vises a com­bi­na­tion of in­dexed unit trusts and RAs for the best of both worlds.

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