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Saving for a child’s education

Lynne asks: I have a four-year-old daughter and I’m saving for her education, high school and university as well as my retirement.

I contribute to a pension fund every month at work and I also invest monthly in unit trusts Allan Gray Stable and Balanced funds via debit order.

I would like to get into equities and would like your opinion for this long-term investment. I am not sure if I should purchase Allan Gray equities or would it be better to invest through a different fund manager. I am also interested in Satrix ETF and have been looking into Fundisa.

Maya replies: This is a great question because it raises the debate I have been having with financial advisor Gregg Sneddon over the appropriateness of Fundisa for long-term savings.

I am a fan of Fundisa as it provides a good guaranteed return and because the bonus will only be paid out if the funds are used for tertiary education. It also instills discipline.

However as Sneddon points out, if you are investing for more than 10 years you are better off in equity-based investments as the underlying investment in Fundisa is fixed interest. Equities should outperform over that period, even taking the Fundisa bonus into account.

Considering that your daughter would have at least 14 years before tertiary education, an investment in an equity unit trust or an exchange traded fund may be a better option. You could consider Fundisa as a top up once she starts high school, for example.

Unit trusts
You could increase your investment in Allan Gray. It is a very good fund manager and I agree that you should be looking at their equity fund for your daughter’s savings.

I would also like to make the point that considering you are saving for your retirement which is 20 years away, your current fund selection is very conservative.

You should perhaps consider opting for the Allan Gray Equity Fund, especially as you are investing monthly and do not have to worry about the current valuation of the market. Make sure you are comfortable with the fact that the fund could lose value in the short-term but over the longer-term it will deliver far better returns.

If you do want some fund manager diversification then you could keep your daughter’s savings separate. Coronation and Investec are the other investment houses preferred by independent advisors. Two to three years before you would start drawing on the savings you could transfer it to one of the more conservative funds within their stable.

Alternatively you could invest via www.investonline.co.za which would give you a portfolio of unit trusts. It would be interesting to do their risk analysis and see what funds they would recommend for you.

Satrix
Satrix Rafi is a good exchange-traded fund to consider as it invests in shares based on their relative valuations rather than the size of the company, so you do not have as much exposure to the mining sector as the Satrix 40 would provide. This exchange-traded fund should outperform the index at a relatively low cost.

Cost of education
What you will find is that even in the best performing fund it would be very difficult to completely fund your daughter’s education from savings — this is something that will largely have to be paid for from your monthly salary.

However what you need to be saving for is the gap that will be created between your salary and school fees as school fees tend to increase at about around 10% per annum compared to salary increases which are around 6% to 7%.

That means each year the school fees will eat further and further into your budget. By starting a savings fund now you will be able to stabilise those costs in the future.

Read more news, blogs, tips and Q&As in our Smart Money section. Post questions on the site for independent and researched information.

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Maya Fisher French
Guest Author

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