How can investing in funds help pay for education?
In our previous article, we talked about ‘investing in funds’ as a means to fund your children’s education. But it all depends on when you start the investing process as time is the single most important factor in deciding how and what to invest in.
Saving and investing for your child’s education costs will depend on how long you’ve got before you need the money. For example, let’s assume your child is three years old. If you are looking at private primary school, you will need the money quite soon. In this case, it’s probably more sensible to keep your money in cash savings.
If, on the other hand, you are looking to accumulate the funds to send your child to private school or to university, your time frame for needing the funds is much longer, giving you more options. In this situation, you have five years or more until you need the money and are therefore likely to be more comfortable accepting a certain amount of risk.
Remember: When investing in funds, whether it’s stocks or shares or funds, a long-term approach is important. Investing in the stock market comes with a certain amount of risk and in the short -term markets can be extremely volatile. However, over time, short-term fluctuations and market swings will balance out.
Back to the Basics
For those of you who are not familiar with investing and all the terminology that goes with it, read on for a quick guide.
When you purchase a stock or a share of a company, you are, in a small way, buying ownership of a company. Companies that sell their stocks are listed on an exchange such as the London Stock Exchange or the New York Stock Exchange. The price of a stock depends on its supply and demand and it changes literally every second. The idea is to buy a stock at a low price and sell it at higher price.
The price of a stock or share also depends on a variety of other factors such as world economic or financial events, natural disasters, performance of the industry and others. It is extremely difficult to predict how the price of a stock or share is going to change unless you have been studying the market and the company for a period of time.
(Investing in stocks and shares can be very risky and you can lose money if you don’t know what you are doing. If you are not familiar with the buying of stocks and shares and market trading, please consult your financial advisor.)
Bonds are issued by governments and corporations when they want to raise money. By buying a bond, you're giving the issuer a loan, and they agree to pay you back the face value of the loan on a specific date, and to pay you periodic interest payments along the way, usually twice a year.
Unlike stocks, bonds issued by companies give you no ownership rights. So, you don't necessarily benefit from the company's growth, but you won't see as much impact when the company isn't doing as well, either—as long as it still has the resources to stay current on its loans.
A fund is a collection of investments chosen by a fund manager who is trying to achieve a specific objective – either capital appreciation or income generation. When you invest in a fund you are effectively buying a part of the fund’s investment portfolio. Funds can be invested in different asset classes – stocks/shares, bonds or even property. Some funds focus on a single asset and some have a mix of stocks/shares, bonds and property.
There are a huge range of funds to choose from and often the choice depends on the purpose of the fund, whether you want income or capital accumulation.
With an income fund, you will be paid an income on a monthly or quarterly basis based on the income that the fund earns. With a capital accumulation fund, the income earned is reinvested into the original pot, increasing your original pot and therefore your long-term returns.
For the long-term, if your intention is to “make your money grow,” for your child’s education, assuming you have 5 or more years before you need the money, we would recommend opting for a capital accumulation fund.
We’d like to reiterate that investing in the stock market, whether directly or through funds requires planning, assessing your risk appetite, research and knowledge of how the markets work. We do not recommend you getting into the buying and selling of stocks and shares if you don’t already have some background.
The key is to plan and have an annual review in order to assess where you are with your finances and where you hope to be in the future.
The Duke Godley team has been working with families for the last 30 years, understanding your needs and advising you on how they can best to invest your funds to be able to afford your children’s education, based on your specific financial situation and goals.