Building Your Child’s University Funds
Scholarships are certainly a preferred alternative for funding your children’s university education. But what if your child is not scholarship material or dislikes the prospect of being bonded to the same job or firm for four to eight years?
You can fund your child’s university education without burning a hole in your pocket if you start early & regularly set aside a reasonable sum. Depending on your risk appetite & investment view, you can build a university fund through insurance savings plans, unit trusts or a combination of both.
Insurance Education plans - these are savings plans with some guaranteed cash component. Yields are limited because a large portion is invested in mainly fixed income, rather than equities. The person insured receives the sum assured at the end of a specified period. Some plans allow proceeds to be withdrawn in 3 or 4 annual instalments to coincide with course fee payments.
Advantages:
1) The plan will not be affected if the parent dies prematurely, suffers total & permanent disability, or is diagnosed with a critical illness.
2) You can rest easy knowing that, once the plan matures, a certain sum will be available when your child is ready for university.
3) Such is plans is good for parents who have difficulty saving regularly, are risk-averse, & are content with the yields from these plans.
4) Annual returns range from 3 to above 4%, so the yields may be nothing to boast about, but they usually exceed those from plain vanilla savings deposits.
Disadvantages:
1) Upside is minimal compared with the potentially higher gains generated by other investment instruments such as unit trusts.
2) If you terminate the plan early, you are likely to get less than the premiums you have paid as most of the maturity proceeds come from the bonus declared on maturity. And if you surrender the plan in the 1st year, you get nothing back.
Unit Trusts
Advantages:
1) A well-diversified unit trust portfolio can offer potentially higher returns than education plans, particularly if there is a long time horizon of, say, 15 to 20 years.
2) Unit trusts offer more flexibility as there are no exit penalties for early withdrawals.
3) They offer more transparency as you decide which markets & asset classes you want to invest in.
Disadvantages:
1) Your unit investment could suffer if there is a downturn in the market due to bad news & this happens when the money is needed for the child’s education.
2) Chances are the investment plan will not be continued if the parent dies prematurely, suffers total & permanent disability, or is diagnosed with a critical illness; henceforth jeopardizing the child’s education fund.
3) Some advisers encourage customers to “Buy Term & Invest the Rest”. Unless you have a systematic & disciplined way of investing, you may end up doing “Buy Term & Spend the Rest”.
Generally, education plans are suitable for parents who typically have more than 10 years to put away cash, while those with a 5-to-10-year horizon can rely on a well-diversified investment portfolio of unit trusts. Alternatively, diversify into both.
