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Think long term, start saving as early as possible

In the lead-up to The Sunday Times Invest Seminar on May 10, we are running a three-part series on how you can get started on that investing journey. This week, we look at how dads and mums can invest well despite heavy financial commitments.

Published on Apr 27, 2014 1:24 PM
 
Mr Ng Yau Wei, 42, with his wife Yap Jun Ting, 28, and their one-year-old son Ethan Ng Sheng Zhe. Before he married, Mr Ng used to dabble in penny stocks and bought shares based on “slipshod homework”. Now that he has a family, he sticks to blue-chip shares with a stable track record and healthy dividends. -- ST PHOTO: SEAH KWANG PENG

Equity funds an option to consider as well

Years ago as a single man, Mr Ng Yau Wei used to dabble in penny stocks and bought shares based on "slipshod homework".

These days, the 42-year-old father of one prefers to stick to blue chip shares with a stable track record and healthy dividends.

The business development vice-president at a Singapore-listed company said: "I'm more conservative now. My family commitments mean I've got to become more cautious in the way I grow and invest my money."

He has bought blue-chip stocks which yield growing dividends to save up for his one-year-old son's education.

To prepare for retirement, Mr Ng pumps $1,000 monthly from his Supplementary Retirement Scheme (SRS) account into a regular blue-chip investment plan offered by a local bank.

Similarly, Ms Jane Sim, 34, has been putting $100 a month since last December into a regular savings plan at a Singapore bank which allows her to buy an exchange-traded fund (ETF) which tracks the Straits Times Index.

"It's a low-cost way of accessing the Singapore stock market," said the mother of one, of her plan which she intends to use to save up for retirement.

"Now, I think more long term when I invest than when I was single, as I want to save up for my son's education, as well as our housing expenses and retirement."

With rising household bills, extra mouths to feed and the need to plan for your children's education and your own retirement, investing wisely becomes all the more pertinent for mums and dads.

"With proper budget management, a family man with young kids could still meet his financial goals and leave a good legacy for his children," said Mr Brandon Lam, head of consumer investment and insurance products at DBS Bank.

Providend investment analyst Eddy Goh said: "The understanding and balance between immediate needs and future obligations need to be managed effectively for families when investing."

Financial experts share with The Sunday Times how these people should invest their funds.

Tweak your time horizon, mindset and risk appetite

Having the right risk appetite, mindset and investment horizon is a key starting point for figuring out what to invest in.

This may involve tweaking your time frame and investment approach.

"A family person with kids should be investing with a medium- to longer-term perspective and not be looking to make a fast buck by trading in markets," said Mr Vasu Menon, vice-president of Singapore wealth management at OCBC Bank.

They should always adopt an investment strategy they are comfortable with, having risk tolerance as a key consideration, said Mr Abel Lim, head of investment sales and advisory for personal financial services at United Overseas Bank (UOB).

"If the investor has always been conservative and risk averse, they should not suddenly adopt a highly aggressive portfolio just to maximise their wealth after marriage and having children," he added.

It is easier for singles to take more risk for more returns, noted Providend's Mr Goh, as they are likely to have fewer financial obligations and higher disposable income.

As for families, their spending will be on immediate needs - which form a sizeable component of disposable income such as childcare and health care - as well as future obligations like college education, he noted.

Thus, it may require two separate investment strategies to meet those two areas.

Consider stocks and do regular investment

The wide-ranging financial needs of a family person may best be met by having a two-pronged investing approach, the experts say.

To meet immediate needs, families with young kids should invest in low-risk and liquid asset classes such as short-term bonds and blue chips, said Providend's Mr Goh.

Liquidity is an important consideration in this case, he added, as such assets can quickly be converted into cash to meet urgent needs without drastic price reduction.

Families can also consider higher-return asset classes like equities to meet long-term needs such as tertiary education for the children, he added.

Those with a higher risk appetite can consider investing in ETFs through regular investment plans offered by POSB and OCBC.

"An ETF has fees and charges that are usually lower than those of actively managed investment funds," said DBS' Mr Lam.

Such schemes offer investors a disciplined and relatively lower- cost method of participating in the Singapore stock market.

They can also gain from the principle of dollar cost averaging - purchasing fewer investment units when prices rise but more units when prices fall.

For a risk-averse family with young kids and aged parents, it will be best to invest in low-risk instruments and to stay liquid by investing in short-term bonds and less in volatile equities, said Providend's Mr Goh.

Families with no immediate needs and seeking higher returns can have a time horizon of 15 years and be aggressive by allocating more to volatile equities and commodities, he suggested.

"In order to manage the excess risk, they should also look into bonds to diversify risk," he added.

Save for child's education as soon as they are born

Time is of the essence when it comes to building your child's college fund.

"With rising inflation and paltry interest rates, it's crucial to save early for your child's education as educational expenses continue to rise," said DBS' Mr Lam.

UOB's Mr Lim added: "With less to invest due to increased household costs, it is important for investors to start planning as early as possible."

According to OCBC's estimates, a Singaporean pursuing a four-year non-medical degree in a local university today will need $38,000 for tuition fees.

In 15 years, the costs will increase sharply.

For instance, a four-year non-medical degree in a local university is expected to cost $56,000, while the same degree in a private American university should cost about $548,000 - more than twice what it costs today.

"Start saving as soon as the child is born," said OCBC's Mr Menon.

One option that parents can consider when saving for their children's education is investing in equities and equity funds, he added.

Banks such as DBS also have education saving plans designed to help the family meet a child's study expenses with cash benefits aligned with the child's educational milestones.

UOB's Mr Lim said: "The investor might want to look at a regular investment plan with a well-diversified portfolio of funds and a dividend yield mandate, together with an endowment plan."

Open an SRS account to save for retirement

Higher-income earners should consider setting up an SRS account, said OCBC's Mr Menon.

"This scheme is meant to complement the CPF scheme, and help Singaporeans build up a retirement nest egg," he noted.

The SRS allows a Singaporean or permanent resident aged over 18 to put up to $12,750 a year into a special account that can be opened at DBS, OCBC or UOB. Foreigners can put in a maximum of $29,750 a year.

Every dollar put into an SRS account allows you to enjoy the same dollar in tax relief, thus lowering your tax bill. For instance, if your taxable income is $100,000 and you put $10,000 into your SRS account, you pay tax on $90,000, not $100,000.

SRS contributions need to be made by Dec 31 each year to claim tax relief for income earned in that particular year.

The SRS funds can be used to invest in a selected range of financial instruments, such as stocks, unit trusts, fixed deposits, structured deposits and insurance. SRS funds cannot be used for property investments.

"Those making SRS contributions should also consider putting their money to harder work by investing their SRS funds for better returns compared to what they would get from idle SRS balances," said Mr Menon.

alfoo@sph.com.sg

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