ETFS will keep costs down
You have very lucky grandchildren. Not only do you want to give them a very substantial amount of money when they’re older but you would like to educate them about saving and investing.
There are many ways you could go about investing for your grandchildren. My suggestion tries to balance ease of operation for you with making it the gift you want it to be.
While having one account rather than three will make it easier for you to manage, the downside is that you can’t show each grandchild their own account balance each Christmas. I would be inclined to set up three accounts to give them a greater sense of ownership. They can then also contribute their own funds to it later if they want to.
Other than kids’ bank accounts, most financial product providers require the account holder to be over 18. So for a share or investment account, you’ll have to establish it in your name. You can usually add an “account designation” which is the name of the child for whom the account is being held.
You don’t have to give your tax file number but if you don’t tax of 49% will be withheld on income earned. By providing your TFN, the income will be included in your taxable income and you’ll be able to apply to the ATO for any franking credits paid by Australian shares held in the portfolio.
Given the portfolio size, an online share trading account can offer you a simple, low-cost solution. To keep your brokerage costs down, I would invest via one or two exchange traded funds (ETFs) or listed investment companies initially (reinvesting distributions), and add to these or potentially expand your holdings each year. This way you can have a well-diversified portfolio without having to select and buy individual company shares.
Given this investment is intended to be held for potentially 14-plus years, I would invest in share funds. There will be a number of sharemarket corrections and recoveries over this period and these will be the perfect times to talk to your grandchildren about the risks of investing in shares and the benefits of having both a long-term horizon and a regular investment plan (also known as dollar cost averaging).
Investment suggestions for your grandkids’ share portfolio:
50% to Australian shares. You can get a low-cost portfolio by investing in the Vanguard Australian Shares Index ETF (ASX: VAS). The management cost is very low, at 0.14% a year, and the fund tracks the return of the S&P/ ASX 300 index and holds companies according to their market capitalisation. An alternative, which has a slight “value” bias, is the BetaShares FTSE RAFI Australia 200 ETF (QOZ). This fund provides exposure to a diversified portfolio of Australian equities, weighted in a way that reflects their economic footprint rather than their market capitalisation.
50% to global shares. Including global shares in your portfolio will improve diversification and give you exposure to sectors such as technology that are poorly represented in the Australian sharemarket. The iShares Core MSCI World All Cap ETF (IWLD) will give you a low-cost (0.16%pa) exposure to a broad range of developed market companies around the world. However, if you would prefer a fund that is selective in its share purchases (an actively managed fund), my pick is Platinum Capital, a listed investment company.
With potential long-term returns of 6%-7%pa, your gifts could grow to $23,000-plus each over the next 14 years and could help fund a really meaningful purchase for your grandchildren at that time.