More than 80-90% of the people I meet, have the need to save for some goal or the other (unless they have inherited a lot of wealth).
Savings plans have the following main features (which you can decide on):
- Fixed Term vs No Term - Savings plans normally have a contractual savings term starting from 5 to 25 years, and anything in between. The latest savings plans in the market offer savings options with no fixed term.
- Investment Vehicle - Typically regular savings plan will offer you a choice of ETFs (index funds) or mutual funds, or both.
- Capital and/or Returns Guarantees - Some savings plans do not offer any capital guarantees. Some guarantee at least your capital. Others offer capital and returns guarantees.
- Currency options - Some savings plans offer local savings currencies, others offer international currencies only.
Factors to consider when selecting the right savings plan for your life goals:
- Investment Term - When do you need the money back?
- If you need your money back in say 10 years to pay your child’s college fees (for example), you must not choose a longer-term savings plan.
- If you have no fixed term in mind, go for a non-contractual savings plan.
- ETFs Vs Mutual Funds -
- Savings plans that offer mutual funds need to be managed by a competent financial advisor.
- Can you select the right mutual funds if your financial advisor leaves you for any reason?
- Others offer only the S&P500 as an option (as recommended by Warren Buffett), where there is no possibility of human error.
- Charges - Savings plans typically have two types of charges;
- Product Charges - Some products have very low charges, some are reasonable, while other have very high charges. Be careful when selecting the right savings plan.
- ETFs or Mutual Fund Charges - ETFs can charge as low as 0.07% per annum, while mutual funds can charge as high as 3% per annum. Make sure that you select a portfolio that is low-cost, and diversified.
- Guarantees - Decide what you want. Each person has a different personality when it comes to money. Some people will not invest without guarantees. Select a savings plan based on your personality.
- Some plans don’t have capital or returns guarantees, so their charges will be lower.
- Others offer capital and returns guarantees, but will have higher charges.