Education policy or Money Market Fund (MMF) for my child’s education? This is a question that I get all the time. Well, today we put this matter to rest by comparing the two funds for planning your child’s future education costs.
Education tuition costs in Kenya, especially in private schools and now in public schools, are increasing at unimaginable levels. Change in school fees is quite unpredictable, but what we have seen so far is a significant increase. As such, education cost planning is necessary and subtle.
Both of these two funds have their strong benefits, and are vehicles designed for different purposes. But how well are they designed for future education planning? Let’s look at each and see how well they perform in this respect.
Education Policy vs. MMF: Which is better for you?
Don’t choose blindly. Let’s look at your timelines and goals to find the right balance of high returns and guaranteed protection.
* I’ll provide a custom comparison for both options at no cost.
Money Market Fund
A Money Market Fund is an investment and an inflation protection. It is a vehicle, designed to cushion your finances (liquid cash) from inflation in the short term. Money Market Fund hardly goes above 20% return rate in Kenya and is subject to management fees and Withholding Tax.
MMF is an investment that has a moderate return. Generally, MMF is a short-term investment vehicle with the purpose of retaining the purchasing power of your money rather than creating large wealth. It is not suitable for long-term investment, unlike equities and balanced funds. Your money earns returns from financial instruments such as treasury bonds, and the fund grows with reinvested interest.
The advantages of keeping your money in a Money Market Fund are that it is a short-term, low-risk investment. It is highly liquid, and with most providers in Kenya, you can get it instantly or within 24 hours. MMF offers stable returns and is flexible, in that you can increase or decrease your investment as you wish through periodic contributions or withdrawals.
Since Money Market Fund offers no insurance protection, attracts withholding tax, and yields a fluctuating return rate, insurance companies that care for their clients usually develop products that introduce or eliminate their uncertainties and taxes. For instance, Britam has investment options derived from the money market that offer some insurance protection, guarantee minimum returns, and eliminate withholding tax altogether. Britam’s investment options tailored this way include Imarika and Nawiri investment plans, and require some monthly commitments or locking of funds for some defined period of time. These products really help in education planning for parents better than a Money Market Fund.
Education Insurance Policy
Education insurance policy is a savings plan designed by insurance companies to cover the future costs of your child’s education. They are specifically designed to cover future school fees of your young ones, and that functionality dictates their terms and components.Â
They range from short-term to long-term savings plans. They are tailored to generate returns that only cover the inflation or the purchasing power of your money. This means that an education policy is not an investment option but rather a savings plan that requires high discipline, sacrificing your money to a desired goal – affording your future school fees burden as a parent or guardian.
Unlike MMF, Education Policy plans offer tax efficiency (they do not attract withholding tax. Actually, you enjoy a tax benefit equivalent to 15% of premium payable capped at KES 5,000 p.m/ 60,000 p.a for policies with a term of 10 years and above), and feature insurance life protection in case of critical illness, permanent disability, and death. What does that mean? It means that most education policies guarantee the future education of your child even if you become permanently disabled as a result of an accident and illness or if you die (may God forbid, shindwe).
Since they only generate very low returns to just ensure your money retains some purchasing power, they have lower returns than the money market.
For education planning, which is the most suitable vehicle to guarantee your child’s education as a parent? Here is a direct comparison of Education Policy and the Money Market Fund.
Comparison Between Education Insurance Policy and Money Market Fund
- One subtle difference is that education insurance policy is a savings plan with guaranteed savings returns regardless of the market conditions while Money Market Fund is an investment plan whose performance depends on the market conditions. MMF is a low-risk, modest investment, while an education policy is a savings plan with savings returns that also cover your money’s purchasing power.
- Another subtle difference is liquidity. A money market fund is highly liquid, such that you can access your money as you wish. Your funds are never locked for withdrawal, and you can access them as you please. On the other hand, education policy is a structured savings plan with a term, and you can not access the savings until maturity or through policy termination at some point, as stipulated by its terms.
- Education savings plans have some insurance life protection stipulated in them in case of critical illness, permanent disability and death. This means your child’s future education is guaranteed. MMF is not insurance-protected (it has no risk protection).
- In education policies, the maturity amount (sum assured) is guaranteed if premiums are paid as agreed. The sum assured, including bonuses if any, is paid as stipulated in the policy contract. On the other hand, a Money Market Fund has no guaranteed returns, and the rate keeps fluctuating according to market conditions.
- A money market fund offers flexibility such that you can increase or decrease your investment according to your financial health. In education policies, a fixed amount (premium) is payable up to maturity. You are allowed to add another policy, within the terms of an insurance company, but the initial policy runs as designed most of the times.
Then, which is better? Allow me to give you a simple rule for education cost planning.
- For short-term school costs (1-5) years, I would recommend MMF, if you have a savings discipline.
- For medium-term planning (6-12) years, I recommend an education insurance policy. It instils a savings discipline helping you achieve a future education fund. Many people overlook this aspect.
- Again, for risk protection, go for an education policy. Come rain, come sunshine, your children’s future education is guaranteed. Your life is protected against adverse health eventualities.
Computation Comparison between MMF and Education Policy
Numbers don’t lie. Assume you want to commit KES 30,000 monthly for your kid’s future education. Let us see how these funds will grow if invested in a Money Market Fund and in an education insurance policy.
- Scenario 1: If KES 30,0000 is invested in MMF with the initial investment of KES 30,000 and monthly contributions of the same amount (KES 30,000) for a period of 10 years. We assume a 9.8% net rate (less management Fees)
Total Amount Contribution (KES 30,000(12)(10)) = KES 3,600,000
Interest Accrued in 10 years (Less Withholding Tax (15% of Accrued Interest) = KEs 383,260.06) = KES 2,171,807.03
Total Amount Available at Maturity = KES 5,771,807.03
- Scenario 2: If a fixed premium of KES 30,000 is made monthly for a period of 10 years in an education insurance policy.
Total Amount Contribution (KES 30,000(12)(10)) = KES 3,600,000
Interest Accrued in 10 years = KES 1,221,459.18
Total Policy Benefits at Maturity (No Taxes) = 4,821,459.18
From the above computation, Money Market wins in return by KES 950,347.85. Does this figure excite you? The question is, do you have the discipline to keep that money in your MMF account for that long? If your answer is yes, are you sure? We said MMF is very liquid and you can withdraw anytime you choose, but you cannot do so in an education policy (money is locked until maturity). People choose an education policy over a Money Market Fund because it instils a saving discipline in you.
As an overall, I advise you to have both of them. Some part of your money should be in the Money Market, while the other portion of it should go to education insurance policies. That way, your future education cost is covered against all odds.
Thank you for being with me till the end, and for that reason, you qualify for a free education policy quote or Money Market Fund quote and rate. Please utilise this opportunity.
