Unit Trusts

Can secure your child’s future
Usually, many parents do not invest in their children citing poor income. However, experts say one does not need a big salary to save or invest. Consequently, many financial institutions have developed various ways through which parents can invest in their children’s education, health or future. Experts say parents should study available options in the market before making a decision. There are various things to be considered like money available, expected returns and the tax implications.

John Kiare, an investment analyst with CFC Stanbic, says Mutual Funds are the best for parents who want to invest in their children’s education.

Mutual Funds or Unit Trusts— sometimes called Collective Investment Vehicles (CIVs) or Collective Investment Schemes (CIS) are financial institutions that pool funds together from various investors and manage the money. Usually, CIVs are eligible for tax exception.

‘There many options available in the market and it is up to the parents who want to invest in their children to choose wisely,’ he says.

Kiare’s advice is that one should carefully choose a basket of schemes that should be a combination of debt and equity investments. ‘There are designated children mutual fund schemes to choose from,’ he says.

He says such schemes can be combined with good diversified equity funds that together can provide better growth opportunities in the long run.

One can also use systematic investment options available with all the mutual funds that also save on the entry cost. Even though there is no uniqueness in children funds, they still provide the following advantages:

• Separate identification of savings towards children.
• Some dedicated children schemes are less expensive than the general ones.
• There will also be a general psychological deterrent – to use children funds for other causes.
• There exists a tremendous tax advantage. Since mutual funds are taxed only on maturity and the same will not be coupled with the parents’ income.

Denis Imonje, a financial analyst, concurs with Kiare that under mutual funds investment, one needs pick carefully where to invest. ‘It is always advisable for one to do thorough homework before he or she invests,’ Imonje says.

He says Mutual Funds are good for a long-term investment such as education, especially when a child has just been born. He says mutual funds provide a solution for investment needs, whether one has a few thousand shillings or millions to invest. With a well-designed portfolio of mutual funds, you can have your own pool of professionally managed investments, even with a small initial amount.

‘Whether you choose to use mutual funds, closed-end funds, or individual stocks and bonds or not inevitably, you must find out the disadvantages and advantages of what you pick,’ he says.

According to Imonje, a well-designed portfolio can provide the maximum long-term returns consistent with the level of risk you are comfortable with. He says the longer you invest in a mutual fund, the more you pay in fees.

‘The reason most financial planners recommend the long-term is simply because the longer you hold on to the fund, the more money they make,’ he says adding that this could be good for parents who want to plan for their children who are still younger, but expected to join university or college.

The advantages include:
Diversification: A single mutual fund can hold securities from hundreds or even thousands of issuers. This diversification considerably reduces the risk of a serious monetary loss due to problems in a particular company or industry.

Affordability: You can begin buying units or shares with a relatively small amount of money e.g. Sh45,000 for the initial purchase. Some mutual funds also permit you to buy more units on a regular basis with even smaller installments like Sh4, 500 per month.

Professional management: Many investors do not have the time or expertise to manage their personal investments every day, to efficiently reinvest interest or dividends, or to investigate the thousands of securities available in the financial markets. Mutual funds are managed by professionals with the education, skills and resources to research on diverse investment opportunities.

Liquidity: Units or shares in a mutual fund can be bought and sold in any business day that the market is open, thus providing investors with easy access to their money.

Flexibility: Many mutual fund companies manage several different funds like the money market, fixedincome, growth, balanced, sector, index and global funds and allow you to switch between these funds at little or no charge. This enables you to change your portfolio balance as and when your personal needs, financial goals or market conditions change.

Importance of investing in mutual funds includes:

Low-cost of asset management: Since mutual funds collect money from millions of investors, they achieve economies of scale. The cost of running a mutual fund is divided between a larger pool of money and you get a lower cost alternative of managing your investment.

Ease of process: If you have a bank account and you are ready to invest in a mutual fund, it is as simple as that. All you need to do is to fill out the application form, attach your PAN for transactions of greater than Sh50,000 and sign your cheque and your investment in a fund is done.

Well-regulated: In Kenya, mutual funds are regulated by the Capital Market Authority (CMA), which helps provide comfort to the investors. CMA forces transparency on the mutual funds, which helps the investor make an informed choice. It also requires the mutual funds to disclose their portfolios at least every six months, which helps you keep track of the fund.  There are also disadvantages that should also be keenly looked at.

Do’s and don’ts when investing in you child
Some people argue that saving and investing are the same. However, experts say they are different. In savings, one will generally get back his or her money plus some interest.

In investment, you may or may not get back the sum invested or you may get more than the initial amount—the higher the risk, the higher the returns.

‘Smart investments are not a matter of luck, but a result of careful planning. When you invest, you should not rely on hearsay. You must spend some time understanding the market, either through research or seeking out expert advice,’says Bob Owuonda, a chartered accountant.

Owuonda says if you have plans to send your children for higher education, there are several ways through which this can be done. The easiest way that most parents and guardians seem to follow is to open a fixed deposit account.

Yet, this is not the only channel through which parents can invest their savings into the future of their children.

‘Mention the word investment to anybody in Kenya and you will notice automatically that education ranks top among other issues,’ says Owuonda.

Once parents are through with their children’s education, that seems to be the end. But analysts say whereas education is important, the future of a child depends on many other things. For a child to succeed in life, a number of things must be taken into account. ‘First the child must have gone to college, have good health and have an income,” he says.

Research done by insurance firms, banks and other institutions in the country indicates that Kenyan parents are investing more in their children’s future than before.

Investment analysts say unlike before, the working class or individuals with income-generating projects are in one way or another saving for their children’s education or buying insurance covers for the purpose.

Joe Nyandiko, an investment analyst with Kenindia, says many parents invest in their children’s future. He says before parents realised the need to do an all round investment for kids, some used to argue that ‘education was everything’ in life.

He says the increasing state of joblessness in Kenya is acting as an eye-opener to guardians and parents to also make other additional investments to take care of the uncertainty in the future.

END: BL 44 / 30-31