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How to choose the best funds for my child

Smart investment choices today can make a world of difference to the value of a Registered Education Savings Plan (RESP) when your child needs it 15 or 20 years from now.

Some investors take a super conservative approach. Not wanting to lose any money, they stick to fixed-income mutual fund* investments that may offer a degree of safety, but not a lot of growth. Others go super-aggressive, figuring that their children have years to recover from any loss.

Do the math: Your choices should depend on how many years you plan to leave the investments growing, tax-deferred, within the plan. In addition, you need to be aware of your investment personality and risk tolerance.

You shouldn't lose sleep over any investment - including your child's education savings. If your risk tolerance is low, consider using the money from the Canada Education Savings Grant (CESG) for investments that offer higher returns, but with greater volatility. Use your own money for the more conservative core holdings. Although each situation is unique, here are some guidelines you can follow:

  • More than seven years: If you have at least seven years to invest, you may want to focus on equity mutual funds. These will give you the highest growth potential and offer the most effective way to outpace ever-increasing tuition costs. Remember the importance of diversification. To increase potential returns and reduce volatility, your child's RESP should include both Canadian and international mutual funds.
  • Four to seven years: As the time horizon shortens, a somewhat more conservative approach is warranted. The growth potential of equities is still needed to offset the rising costs of an education. But you may want to increase the portfolio's fixed-income weighting in preparation for your child's first year of post-secondary education. In this situation, a balanced fund might be a good addition or a mix of fixed-income funds and one or two less volatile equity funds.
  • Less than four years: If your child is going to need the funds in the next few years, you'll want to shift the RESP's holdings into funds that minimize volatility and investment risk. Depending on your investment profile, these may include a mortgage fund, shorter-term bond fund, or money market fund. Finally, as your kids get older, you'll want to slowly reduce your weightings in equities, acquiring a greater weighting in fixed-income investments.

Up Next: RESP - the free money angle

Families with modest incomes can still help put their kids through post-secondary education with smart planning and a boost from government grants and matching funds.
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