This article was updated on 10 June 2019.
This article was written in collaboration with SGX. Views expressed are the independent opinion of DollarsAndSense.sg
Education is important and often very expensive. In recent years, the cost of university education in Singapore has increased to a point where parents can no longer afford to pay for it without a financial plan implemented years in advance.
With local university education costs rising nearly 50% since 2007, we can only expect it to continue increasing going forward.
On to some good news – if your child is still young, you have a sufficient amount of time to start investing towards his or her future education. As with all investment goals, time is one of your greatest allies and you cannot afford to procrastinate.
In their aim to start early, and usually after an agent introduces a product they sell, many parents opt to buy endowment plans for their child. Endowment plans are like a hybrid between savings and investment plans, offering both guaranteed and non-guaranteed returns over a designated time period.
However, buying an endowment plan for your child’s education is not the only instrument you can use, and may not be best suited to your needs. Which is why you need to know other options available.
Regular Shares Savings: A DIY Alternative For Average Singaporean To Start Learning How To Invest
In recent years, several brokerage houses and even fund management firms have started offering retail investors Regular Shares Savings (RSS) plans. RSS plans allow investors to start invest by committing as little as $100 a month, enabling them to steadily grow their investment portfolio over time.
Here are a few good reasons why RSS plans are sensible DIY alternatives to fund your child’s future education.
#1 Dollar Cost Averaging
You’re able to average out your investment cost over time. Commonly referred to as dollar cost averaging (DCA), this strategy allows you to invest a fixed amount of money each month to buy shares or Exchange Traded Funds (ETFs).
By investing a fixed amount over a long time horizon, you automatically buy more shares or units in an ETF when prices go down, and less when prices increase.
Here’s an example of how a DCA strategy may work out:
|Month||Share Price||Monthly Investment||No of Shares / ETF Units Bought|
|February||$1.10||$1,000||909 (buy less)|
|March||$1.20||$1,000||833 (buy less)|
|April||$0.80||$1,000||1,250 (buy more)|
|May||$0.90||$1,000||1,111 (buy more)|
|Half Year Review||Average Share Price: $1.00||$6,000||6,103|
The table above illustrates the simple value proposition that DCA is able to bring – and that is, to not have to worry about timing the market or finding the best time to invest.
This reduces your exposure to volatility. You can see that even if the prices fluctuate by up to 20% higher and lower, your cost at the end of the day is averaged up or down over time.
#2 Lower Transaction Cost
Transaction cost is also an important area that you can’t afford (literally) to ignore since you are investing over a long time horizon.
It’s not uncommon to find endowment or investment plans sold in the market where investors receive returns of more than 2% lower than what their endowment plans have achieved. This is due to various types of transaction costs such as fund management fees, sales charges, account maintenance fees and other administrative costs.
Buying stocks and ETFs through an RSS plan does not mean you eliminate transaction cost completely. There are still fees you will incur including brokerage commission when you buy shares each month and a fund management fee if you invest in ETFs.
#3 Automatic Investing
One of the biggest challenges with building up an investment portfolio over a long time horizon is being disciplined enough to continue to invest each month. However, there are times in our lives when we may be too busy, and may overlook our own investment plans.
One of the main selling points for products like endowment plans are that automatic reminders are sent to you each month if you forget to pay your premiums. This keeps policyholders reminded of the commitment they have made to upkeep these plans.
You can implement a similar system for your RSS plans. You can create a standing order with your brokerage firm to automatically invest a sum of money each month on your behalf. This investment will only stop if you 1) change your instruction or 2) run of out money in your prefunded or savings account.
The benefit of investing via an RSS plan is that unlike many endowment plans, you are able to pause or change your investment decisions at any point in time without incurring a penalty. This gives you the flexibility of being able to retain a lot control over your investments. If you change your mind midway through an endowment plan, you will typically incur hefty penalties or charges on your investments.
Diversification is an important concept for investing. The idea is simple, never put all of your eggs into one basket regardless of how confident you are. Diversification offers investors a way to limit risks in their investment portfolio without reducing their overall expected returns.
By choosing ETFs such as the Nikko Am STI ETF and the ABF Singapore Bond Index Fund, investors are able to immediately diversify their portfolio via a cheap and effective method. You can invest in these ETFs through your RSS plan as they are listed on the Singapore Exchange (SGX).
How Can You Start Investing Today For Your Child’s Future?
Getting started is easy. You just need to open a Regular Shares Savings plan with one of the three brokerage firm/banks in Singapore that offers it.
Do consider the brokerage fees charged by each of these firms to understand which will give you the best rates based on the amount you are likely to invest each month.
*From 12 June 2019, Maybank Kim Eng will no longer offer its Monthly Investment Plan (MIP).
We ourselves tried the OCBC Blue Chip Investment Plan (BCIP) recently. Setting it up was relatively easy as we already had an OCBC savings account. It took us less than three minutes to set up our BCIP, and to input an order to purchase units of the Nikko AM STI ETF.
The photo below shows our statement after making the investment.
We’re not trying to tell you how much you should invest. What we did was invest $1,500 each month. We incurred a $5 transaction fee, which is about 0.33% of our investment.
A total of $1,492.16 was invested to buy 439 units of STI ETF at a price of $3.399 per unit. The remaining amount of $2.84 (not enough to buy an additional unit of the ETF) was credited back to our account.
Build Up Your Investments Over Time
To sum it up, there are strong merits to consider using an RSS plan to help you invest for your child’s future education.
If you are new to investing, an RSS plan allows you to get started with just a small amount each month. This is a good first step into the investment world, even as you slowly build up your own investment knowledge over time.
At the same time, if you are unsure about what to invest in, you can choose an investment such as the STI ETF that gives you immediate diversification through a portfolio that consists of 30 of the biggest companies on SGX.
RSS plans also help you to save on costs incurred as you are managing your investments on your own, as opposed to paying someone else to do it on your behalf. In addition, using a DIY plan also means you retain full flexibility and control over changing investments decisions at any time without incurring any fees or charges, as opposed to being locked-in to an endowment plan.