Available options to secure your child’s future

When Cathy Karen was born, her father was optimistic he would buy her an insurance cover that would guarantee her good education.

However, while Karen’s cover ended smoothly in 2010 after 25 years, her father feels itchy about advising anyone going for a similar product. Peter Odongo, the father, says when he bought the cover, not many options were available in the market.

Odongo says he cannot recommend the product for those who may be interested in buying it as an investment option for their children’s future. Instead, he advises parents to evaluate the products being offered to them seriously before taking the risk.

When Odongo chose the education policy for Karen, he did a mistake by not evaluating key issues such as the expected returns, its liquidity and risk. ‘If I was asked to choose again and which options to take, definitely I wouldn’t take insurance as an education option,’ he says.

Many Kenyans are today investing in their children’s future – but are rather opting for other channels instead of the old investment options which not only can guarantee their education, but can as well secure their financial well-being.

Investment analysts advise that one should not rush for any investment option, unless he or she has undertaken a thorough research or due diligence in the sector he or she intends to invest in, especially when it is a long-term investment like that of a child’s education.

According to experts, key issues that a parent must look into before considering an investment option include the age of a child at the time of investment – this will decide how much risk you can take. For instance, if you are young, you can invest in relatively riskier investments.

Others include the period a parent intends to invest, time horizon- when one wants to sell his or her assets, whether she or he is at liberty to do so. Liquidity-how fast one can convert his or her assets into cash and tolerance for risk- how much risk are you willing to take?

But that not withstanding, what are the available investment options in Kenya for a parent who do not wish to take an insurance cover for his or her child?

Indeed, the investment channels are many. John Kirimi, a director with Sterling Investment Bank, says that a lot parents hardly do due diligence when it comes to identifying good investment options.

‘And because of this, the result is always disastrous. Although parents invest in their children’s future, the choice revolves around buying T-bills, stocks, bonds, mutual funds and real estate. However, while the above investment options are frequently used, they have both advantages and disadvantages,’ he says.

Anthony Mwithiga, Chief Investments Officer at Stanbic Investments, says although parents approach the investment issue of their children differently, what is encouraging is that most parents are putting stake in the overall well-being of their children rather than sticking to education alone.

‘Individuals have started acknowledging the importance of having a solid financial base their children after completing their education and this depends entirely on what they have invested at an early age,’ he says.

‘Contrary to what used to happen in the past, parents who invest for their children’s future are relatively small in Kenya, but there is hope that the number will grow as the economy continues to improve,’ says Mwithiga.

According to Mwithiga, although investments in mutual funds are relatively risky, they are becoming a popular investment instrument in Kenya because of the advantages they have over the existing investment channels.

‘Most people choose to invest in mutual funds because it has so many avenues through which one can diversify the investments in order to reap the highest return on investments,’ he says.

He adds that mutual funds are safer than investing in stocks, bonds or other assets because it is relatively easier for one to diversify his investments through investing in one mutual fund, especially for a person who at the time of investment is still in school. ‘You best invest in mutual funds through systematic investment plans because you don’t buy always on peak price and you don’t need much money to start investing,’ he advises.

But Kirimi says the urge to invest for children is gaining momentum in Kenya than never before due to uncertainty. ‘The best option to invest in a child’s future is when a parent undertakes long-term options and the instrument that can best fit this is when one takes bonds sold through public or private firms,’ he says.

‘Usually, investment in bonds is less risky than other investment instruments in the Kenyan market and the interest rate is always high compared to what financial institutions, especially banks, give to those investing in fixed deposits,’ he adds.

Karimi says anybody with a child can opt for such an investment because it has the savings element incorporated in it and immediately a child leaves school, he or she gets the money after the maturity time to do whatever the or she wants to do with it.

‘Although insurance products act as investments vehicles, the risks involved if taken to cover for a child’s future, is that if she or he happens to die, getting back the money would be difficult unless it has reached its maturity stage,’ he says.

Analysts agree that infrastructural bond is considered as a long-term savings for people who want to invest for children and therefore is an alternative investment vehicle other than making investment in hard assets like real estate.

Alexander Muiruri, a research analyst at Dyer and Blair Investment Bank, concurs with Karimi, saying Kenya needs to promote a saving culture to hedge against domestic shocks such as inflation.

Muiruri says unlike fixed deposits in banks, infrastructure bonds come with the advantage of saving tax. As opposed to a fixed deposit holder, an infrastructure bond buyer will be required to pay tax on the interest earned from the bond and that will not be deducted at the source, as is the practice with fixed deposits. ‘One cannot invest in the future of her or his child by buying T-Bills or shares because they are meant for short-term investment and are affected by the rising cost of inflation,’ he says.

Muiruri, therefore, advises parents to buy public or private bonds which offer reasonably good return as the principal amount is returned after every year at a given percentage.

‘The risks associated with mutual fund investment are much higher with respect to those in infrastructure bonds,’ he says.

‘Investors who are habituated to risk-free investment might be unwilling to venture into market- linked products. Investments should be governed by investor’s risk-appetite and not on the scale of returns,’ adds Muiruri.

James Murigu, the Executive Director Metropol East Africa, also advises parents to buy long-term bonds in which the investor will opt for either annual or cumulative options. In the annual option, the investor receives the interest amount every year, whereas in the cumulative option, the interest amount gets reinvested and the investor can draw the full amount comprising both the principal and interest at the end of the investment period.

Murigu agrees that mutual funds can provide not only an excellent investment vehicle for your child’s education, but also guarantee him or her some financial security when he or she is older.

Just like Karimi, Murigu prefers that parents take mutual funds as investment for their children ‘because it is a good way to put a young investor on track to secure returns near the averages for the long-term.’

‘Since the funds are invested in multiple stocks, the winning stocks buffer the losers and take the sting out of a bad bet on a single stock,’ he advises.

However, he cautions parents to ensure that they start investing for their children as soon as he or they start going to school.

END: BL 43 /24-25