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As it gets tougher by the year for young people to enter the workforce without a university degree, it is little wonder that parents worry about their children's education. Parents are faced with escalating costs as well as deciding where their children are likely to receive the most suitable education.
Experts say that someone born in 2003 and entering university in Hong Kong in 2021 can expect to shell out nearly HK$1million for an undergraduate degree.
Derek Young, chief executive of ipac financial planning (Asia), says two facts have to be faced regarding a child's education: there can be few better starts in life than a quality education and that education does not come cheap. 'Saving for college takes many years of planning and preparation, and the more children there are to send to college, the more difficult it becomes,' Mr Young says.
When parents make investment choices to fund their child's education, they need to consider the age of the child and how soon the money will be needed for education. A longer time frame allows parents to take advantage of investments that potentially offer a better return, but with greater risk. The sooner they need the money, the less risk they can afford to take because preservation of capital becomes more important than a high rate of return.
So, what is the best approach to planning for a child's education? Ultimately, it depends upon parental circumstances and the educational expectations for their children. 'Once parents have worked out the type of education they desire for their children and the expected costs, they are in a good position to design a sensible investment strategy,' Mr Young says.
With hundreds of insurance, endowment policies and mutual funds to choose from, selecting the ideal investment vehicle may not be as straightforward as parents may wish. There has been a growing trend for parents to use mutual funds to save for their children's education because they are easy to understand and their costs are relatively transparent.
To narrow the choice, two investment strategies need to be taken into account - time and diversification. The longer the investment horizon, the better placed investments are to weather inevitable short-term fluctuations in the market. The time horizon is simply the number of years until the start of a child's tertiary education. 'As major market swings tend to move in five- to seven-year cycles, parents with an investment horizon of 15 years are in a good position to capture several cyclical market movements,' explains Mr Young.
Using diversification as the guiding principle, the strategy helps to mitigate volatility. For instance, with a reasonable time horizon investments can be spread across cash, bonds and equities. The precise proportion invested in each market needs to be determined by the financial goals and the level of risk investors are prepared to bear.
It is also important to make sure the principal breadwinner is adequately insured so that, in the event of death or debilitating illness, family commitments, including long-term education planning, are adequately covered.
There are plenty of endowment-type insurance policies in Hong Kong, but they may not be the best investment vehicles. An endowment will typically have a lock-in period, so if circumstances change, or the policyholder is unable to make payments, there could be expensive default clauses. 'Parents who already carry adequate insurance would probably not benefit from the additional insurance coverage and the money spent on the guaranteed part of the policy could be better invested in other ways,' Mr Young says.
Property investment also carries certain risks, such as a drop in the property market at a time when liquid assets are needed to pay for education. In addition, a property may need to be sold when only a proportion of the assets are required. As an alternative to investing directly in property, there are a number of regional and global property funds and real estate investment trusts (reits) that invest in property as an underlying asset.
Louis Cheng, from Hong Kong Polytechnic University School of Accounting and Finance, says most parents encounter only two major financial goals: their children's education and their own retirement. 'I am a strong advocate of a goal-orientated savings plan that parents use only for saving for their children's education,' Dr Cheng says.
'There are many ways to save for university education and many different types of investment plans geared to all budgets, so anyone can save and plan ahead. Whether they can save HK$300 per month or HK$1,000 per month, provided that parents start early, a little savings can go a long way over time,' said Dr Cheng, the author of Kiddomoney: Operation Apple Pie, a popular book that gives examples of how parents can teach children the value of money and ways to save.
Dr Cheng said the government's kindergarten voucher scheme, which can save parents up to HK$30,000 if their children attend a not-for-profit preschool, could form a platform for future education planning.
The earlier parents start saving for their children's education, the better
Savings plans should be diversified to cope with volatility
Endowment insurance polices may not provide the best savings plan
Saving little and often is better than waiting until it is too late
When parents make investment choices, they should consider the age of the child and how soon they will need the money for education