First of all, assisting your daughter in planning ahead is a noble gesture. Deciding how to invest the money you are setting aside to support your daughter’s home purchase is an important decision. Given the current economic climate, it is wise to consider all your options.
Unit trusts: As you mentioned, you have currently invested the funds in a unit trust structure where money is pooled from various investors and may be diversified between several asset classes such as shares, bonds, property and so on.
Depending on the asset allocation, a unit trust investment has the potential for higher returns over the long term compared to more fixed-income options, such as fixed deposits or money market accounts.
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However, it is also exposed to market fluctuations, and your investment value can go up or down on any given day. The performance and volatility will, therefore, be determined by the fund selection and underlying asset class allocation of the unit trust account. Thus, depending on your current unit trust account fund selection, the account value can very well vary in value in line with market and underlying asset value movements day to day.
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Fixed deposit and money market: Both fixed deposits and money market investments are fixed-income-classified funds. Typically, the retail banks will offer a fixed deposit, which will provide a fixed interest rate for a specified investment period.
Fixed deposits are usually recommended for shorter-term periods, 12 months or less, as they offer capital certainty and a predefined interest payment(s).
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Money market accounts are similar to fixed deposits and are typically offered by banks and other financial institutions as cash or unitised funds. They allow for easy access to your funds, often within 24 hours, are considered low-risk investments and may offer more appealing interest rates when compared to regular bank savings accounts. Unlike a fixed deposit, the interest rates on money market accounts will fluctuate; therefore, the net rate you receive cannot be as precisely calculated as with a fixed deposit.
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Although the certainty and predictability of these fixed-income options can be appealing over longer periods, they typically produce lower returns than those of market-exposed unit trusts or share portfolios. In addition, one always needs to keep in mind that inflation will also erode purchasing power over time. Therefore, if the interest rate(s) achieved on these accounts does not at least keep pace with inflation, then the real value of your investment will be declining.
Considerations
Considering the four- to five-year time frame, you will need to consider your personal appetite and need for investment growth to account for inflation against the uncertainty of market volatility. You could therefore consider having a diversified investment strategy where your investments are spread across various asset classes to balance risk and potential returns.
On the surface, it appears that you are uncomfortable with the possibility of market fluctuations, so you might want to lean more towards conservative options, such as fixed deposits or money market accounts.
However, you should also be wary of making investment decisions based on short-term market fluctuations, as a long-term investment horizon can help ride out market volatility.
Ultimately, the choice between a unit trust, fixed deposit, or money market account will depend on your financial goals, risk tolerance, and the advice of a financial professional. The most suitable option may involve a combination of these choices to achieve the right balance between growth potential and safety for your daughter’s home purchase.
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