Saving for university with investment companies

For thousands of students, A-level exams are now over and, subject to getting the right grades of course, they’re looking forward to university. But the financial test that college will put them and their families through could be every bit as demanding as the academic examinations they’ve just sat.

Since 2012, universities have been allowed to charge tuition fees of up to £9,000 a year – and an increasing number now ask undergraduates to pay the maximum amount. Moreover, fees may be set to rise further in the years ahead – the Government has refused to rule out allowing universities to charge more over the course of the current Parliament. Many universities want to be able to increase fees at least in line with inflation.

Add in the cost of living expenses and it’s easy to see how some analyses have concluded that students could be leaving university with £50,000 worth of debt or more.

That’s assuming they start their university education with no savings to draw upon. Planning for the cost of children’s higher education hasn’t always been something Britons have been good at, partly because the cost used to be so much lower, but this will now have to change. In the US, for example, where expensive tuition fees have been a fact of life for decades, many families beginning putting money aside in a ‘college fund’ almost as soon as their children are born.

How best to do that in the UK? Well, independent financial advisers have long advocated the use of investment companies for saving on behalf of children. Closed-ended funds offer an attractive combination of low cost and strong long-term performance, which makes them particularly suitable for putting money aside for children’s future. And if the money doesn’t turn out to be needed for university – plenty of young people are now deciding moving straight into work makes more financial sense – the funds can be used for other purposes. There might even be enough for a deposit on a first home, say.

Many financial advisers report that parents are unwilling to take much risk when investing on behalf of children – even though their time horizons, at least at the beginning of the process, are very long-term. After all, if you’re investing for a new-born with the hope of producing a decent nest egg for university, you’ve got 18 years to get over the short-term ups and downs that assets such as stock market investments sometimes suffer.

The savings schemes for children offered by several large investment companies can provide additional reassurance. For one thing, the large global funds offer exposure to a broad range of stock markets and companies. Diversification of this sort is a very important way to manage risk – it’s the principle of not putting all your eggs in one basket.

In addition, savings schemes drip-feed small amounts of money into the market on a regular basis – some investment companies allow investors to put in as little as £25 a month – rather than in one large lump sum. This enables investors to benefit from a statistical quirk known as pound-cost averaging – the idea is that in months when investments are falling in value, you get to buy extra shares in the fund, which then benefit from the subsequent bounce-back. Over time, the effect is to smooth out volatility.

For all these reasons, investment company savings potentially offer an excellent way to put money aside for children’s university education. Just make sure they’re buying dinner on Graduation Day.