"I used to have a term deposit for the Grandchildren, but the banks don't pay anything anymore. Where could I best invest around $ 10,000 for each of them?"
Heidi in Brisbane, QLD
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Hi Heidi, thank you for sending in your question. You’re absolutely right, a Term Deposit isn’t yielding anywhere near what it used to, so you are right to start thinking about alternatives to make sure your money is still working hard for you (and your grandchildren).
To answer your question, there are a few things I would consider, being:
- What are you seeking from your investments?
- The ages of your grandchildren and when the investments might be transferred to them.
- Other Estate Planning considerations.
Would you like your funds to produce income, achieve growth, or a combination of the two? If you are used to the capital security of cash and are seeking only income, then bond managed funds or ETFs may be the investment that’s right for your needs as they will also produce income and are considered stable defensive assets. Shares obviously have a combination of growth and income in the form of dividends, but you must be comfortable that share values go up and down very frequently so you will ideally have a longer-term investment time frame to reduce risk of loss.
This consideration is very closely tied to the risk tolerance or the ‘risk profile’ that is most appropriate for you and the purpose of the investments, which determines how much of the total investment should be invested in different types of asset classes. The funds can be invested according to your tolerance for investment risk or something more flexible that reflects the preferences of the grandchildren that you intend the money to end up with. If you prefer them to be invested in line with your own risk tolerance, and I’ll make an assumption that you are already retired and seeking stability/income, then a more conservative diversified investment or a bond fund might be your preferences. Currently, these sorts of funds are showing 12 months returns of between 2.5 – 5% depending on the fund manager and the specifics of the fund.
If you want the funds to be transferred to your grandchildren once they reach a certain age, for example at age 25, and assuming they are 10 years old or younger at the moment, then you could consider that you have an investment time horizon of at least 15 years. This approach could allow you to take on a bit more allocation to growth investments if you wanted to because, in that longer-term time frame, the investments should achieve higher growth as well as the income component year on year, and typically would be returning upwards from 5% per annum, depending on the growth component you take on.
The level of extra growth to take on is where it can be useful to discuss the strategy that is right for you and your grandchildren with a Financial Planner as there are many potential investment choices and Estate Planning implications that you could make from here for each of your grandchildren. A more diversified fund or ETF would make sense here if you are feeling that the longer-term horizon makes sense to your situation but each of your grandchildren will be of different ages which may change the appropriate mix of investments to their funds accordingly. Their ages and your specific legacy goals could also mean that you should consider an update to your Will, as there may be more tax-effective ways to structure the investments so that your grandchildren aren’t penalised for being under 18 years of age. For example, if your grandchildren were all under 18 and they received an inheritance, they will be subject to penalty tax rates of 66c for every dollar, but this could be avoided by using a Testamentary Trust in your Will.
Diversifying investments is a golden rule so I haven’t mentioned direct investments here given your investment of $10,000 per grandchild, so a managed fund or ETF would help you achieve diversification and maintain liquidity/accessibility very easily but the specific mix of assets to invest for each grandchild is where a Financial Adviser will be able to guide you best, as well as pointing out in advance any items to consider for future generational wealth transfer before they could cause issues down the track.
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