Funds for education

2012-01-28 09:53

This month we received many questions on how to save.Ironically, it is often easier to tell people how to get out of debt and create savings than it is to tell them where to save.There are so many options out there that this often creates a hurdle to opening a savings account.The key is to start saving somewhere and to always compare costs.Even a mediocre return is better than no return at all. Don’t allow the plethora of choices to prevent you from starting to create wealth.

Seraki writes:
I am planning to invest in an education policy through Old Mutual for my son from this month. He is now one year old and I am planning to put in R400 each month until he completes matric. Is this the correct route to investing, especially regarding Old Mutual, or are there better options?

Maya replies:
It is fantastic that you are making plans for your son. By saving R400 a month for 17?years, you will have an estimated R215 000 saved.

In terms of the education policy, there are positives and negatives and one needs to understand the benefits and weigh them up against the costs.

If you are able to continue to contribute for that period, it is a good investment.

The problem arises when you stop contributing because a policy is most likely structured as an endowment with a specific time period. If you stop contributing, some penalties may apply.

The positive is that having a contract creates an incentive to save. A policy may also contain other benefits such as death and disability cover so that the premiums continue to be paid even if you are unable to.

Discovery, for example, has an education policy that will fully cover the costs of education if something happens to you.

You could also opt to invest in a unit trust or exchange-traded fund. The costs of these can be lower as they do not carry the policy costs and you only pay for the underlying investment.

The monthly minimum contributions are usually higher than for a policy. However, in your case R400 would be sufficient to invest directly into a unit trust or an exchange traded fund like Satrix.

When taking out a policy, there are some important questions to ask:

» What is the minimum term I can sign up for? Always take the minimum term you can continue to contribute towards. You do this because chances are if you cancel before the full term, there may be penalties. So basically, it does not make sense to choose a long-term investment.

» What fees will be charged in total? Understand how much is paid to the broker, how much Old Mutual will receive and what the upfront and ongoing fees will be.

The industry requires the product house to stipulate the “reduction in yield”. In other words, how much will the fees affect your returns?

» What is the underlying investment? As this is a long-term investment of 18 years, it is important that you have a high percentage in equities in the portfolio to keep up with inflation.

» What risk cover do they offer?

Does the product have disability, death or retrenchment cover or do you have to buy that in addition to the policy. How much will the “extras” cost and how do they compare to other insurances?

Jaco Gouws, head of Max Investments at Old Mutual, makes the important point that you need to increase your monthly savings each year in order for the savings to keep pace with the increase in school fees.

“The cost of education increases about 4% above inflation. This means that it’s likely that your child’s school fees increase quicker than your salary.

“Also, it is important to invest in funds or assets that increase at a higher rate than inflation. These funds typically have a bigger portion of shares or property. This should help you to avoid using a bigger and bigger chunk of your salary every year.”

He says you have two options in terms of policies at Old Mutual. You can invest with Max Investments with a minimum of R250 a month, but this is for a contractual period of between 10 to 15 years. Alternatively, you can elect to pay on an “as and when” basis with the minimum of R500 a month.

“There is a wide selection of just over 200 funds by the leading asset managers available,” says Gouws.

“You will be able to find funds that could match or beat education inflation.”

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