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A Fin24 user wants to invest in exchange-traded funds as a way of providing for his children's education. He writes:
I would like to invest money for my children's education. I have R25 000 to invest and can top it up with monthly debit orders of at least R500.
Which vehicle should I go for? I would like to invest for a minimum of 15 years.
I have heard of the Satrix 40 exchange-traded fund (ETF), the Satrix Indi 25 ETF and DBX Tracker MSCI USA ETF.
Please advise.
Mike Brown of ETFSA responds:
For an investment of R25 000, with regular top-ups from debit orders, it is normally worthwhile considering a balanced portfolio approach to a long-term investment of 15 years or more.
The benefits of a balanced portfolio spread over multiple asset classes is that this increases diversification, reduces volatility (risk) and enhances performance potential because of the wide spread of exposure.
A simple strategic asset allocation model that should work well over a 15-year period is as follows:
(etfSA)
You could consider the following equities for each asset allocation class:
(etfSA)
You should consider the following when setting up education accounts for your children:
- Set up separate third-party accounts for each child. The parent has control of this investment until the child reaches a majority age of 18 or more, when control of the investment can be turned over to them.
As the investment has always been in the child’s name, the transfer of control does not trigger transaction or taxation charges.
- The use of an “investment platform”, like the etfSA Investor Plan, could be considered.
These platforms allow multi-ETF investments, where all charges are “bulked” rather than charged for each single investment. This saves considerably on costs.
- Debit orders, at any regular intervals required by you, can be easily done on an investment platform, but are difficult and costly to do through stockbrokers, for instance.
- Reinvestment of dividends, which is a key ingredient to growing capital over time, is done automatically on investment platforms.
- Investing directly into ETFs for third-party investments (or unit trusts if you can find any giving similar performance and low costs over long periods of time), is usually superior to using insurance products or endowments often sold as education policies. These are costly, make it difficult to access capital and often give poor residual returns.
You can select the ETFs used in the education portfolio on your own behalf or approach a properly licensed financial adviser to provide guidance on listed securities such as ETFs.
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