How to invest best for kids?

TWO OPTIONS: TAX-FREE INVESTMENT OR ENDOWMENT.

There are many options when saving for your children’s education. Mike Lombard from Pfire gives advice.

Investment decisions are never made in isolation of a more comprehensive holistic estate plan.

AMoneyweb reader asks: I’m planning for my children’s education. I’m not completely convinced the education policy route is best. I’ve also researched other types of investment vehicles like endowment and unit trusts. I’d like to ensure maximum return on my investment at the best interest rate possible, and minimise income tax liabilities and the like when I require payout. My investment term is 12-15 years. Please advise on the best route.

Mike Lombard, sole owner of Pfire, answers:

With all the “savings” options available it can be a daunting decision for anyone. Here’s a quick explanation of different investment types: ○ Secured investments: Think of savings accounts, fixed deposits, money market accounts. Your capital is always fixed and you earn an interest from it (highly unlikely that you’ll lose your capital). You can choose to draw the interest or add it back to your investment. ○ Market-related investments: Your investment capital may be at some risk because you choose to invest in something where the value of the investment rises and falls daily. The height and frequency of the peaks and troughs in these types of investment is known as volatility. Advisors often refer to “investment performance” (how well or badly it has performed) and then investment decisions are made based upon expectations and not certainty. These types of investments may include sticks and shares or unit trusts.

Wrappers:

With this in mind, there are only two big options available. Where it gets a little complicated is where the investment sector has been able to wrap any one of/combination of the above options in one single investment product type. These product types are commonly known as wrappers and may exist in many forms – many of which are found in policies.

We made some assumptions based on the question. We know: ○ the investment term – 10 to 12 years. Reference is also made to the reader requiring payout, implying the need for some flexibility. ○ investment performance is a priority; we’ll assume the reader is looking to choose a market-related investment option. ○ from a risk and volatility viewpoint, “maximum returns” are sought, but because it’s for education, there needs to be some mitigation of risk, especially as it’s over the long term.

Note, in this response, we’re only looking at FSB-approved investments, not alternative investment schemes, for example, fixed property, private investments etc.

So, where do you invest?: There are two options in the table below: