High Risk Mutual Funds & Saving Accounts for Children
With the high cost of secondary education, many people are looking for long-term investments that help grow savings for children. Many advisers relate risk to time frame, suggesting that longer-term investments can withstand the extreme ups and downs of high-risk mutual funds. On the opposite end of the risk spectrum are savings accounts. There are many things to consider when choosing an investment for your children.
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Mutual Funds
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Mutual funds are investment vehicles that pool investors' money with others to buy securities that fit into the objectives of all the mutual fund investors. While mutual funds can invest in both stocks and bonds or a combination of the two, high-risk mutual funds focus primarily on stocks. Mutual funds that have a high weight in new technology development, emerging markets and small capitalization companies are considered high-risk. These equities either have unproven track records or high development costs that may not be recouped. Additionally, foreign investments are at additional risk because of currency fluctuation and political and economic climate variances.
Savings Accounts
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Savings accounts are usually the first place to start when saving money for a child. Money held at banks is insured and yields a moderate return on the money. It is also very liquid in the event you need some money in emergency situations.
Risk and reward are correlated. Savings accounts don't really help to build assets as much as they help to simply place money aside and save it. -
Time Frame
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One of the considerations when looking at an investor's risk tolerance is the time frame of the investment. If you are looking at an investment with a proven track record over 20 or more years, then you should strongly consider time frame to determine what is a better investment option.
Those looking at needing the money in more than 15 years, are considering a long-term investment time frame. This means that, while the investment will fluctuate in value, well-managed funds should be able to perform well over this period of time, perhaps doubling or tripling your initial investment. As you get closer to needing the money, you should begin to pull money from high-risk investments and into conservative savings accounts to protect the assets.
Risk Tolerance
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If you are new to investing, you may not be comfortable placing your child's education in a high-risk mutual fund. These are not FDIC insured and have wide fluctuations in value. In spite of being warned about the fluctuations, many people are simply not comfortable with the movement. If this is the case, you may want to look at lower-risk mutual funds combined with savings accounts.
Diversification
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Diversification is the key to smart investing. This is true for both conservative and aggressive investments. While you may be comfortable with high-risk investments, be sure to create a portfolio of several mutual funds in different sectors. This may be dividing the assets into thirds and investing in a small cap fund, an emerging market fund and a new technology fund. As you get closer to needing the money, you will want to diversify into less aggressive funds that don't fluctuate as much to preserve the assets that you have accumulated.
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