When you meet with an advisor to set up your registered education savings plan (RESP), you’ll be asked how you want your contributions to be invested. There are 2 options:
1. Fixed-income investments:
These include short-term bonds, guaranteed investment certificates and cash held in an investment savings account. Why are they are called “fixed”? Because they offer a fixed rate of return. They pay you a set interest rate and provide you with the security of knowing your investment is guaranteed not to drop in value. The downside? When interest rates are low, the amount you earn on your contributions is also low.
2. Equity investments:
These include stocks, which are publicly traded shares of a company or corporation, and equity mutual funds, which are pooled investments consisting of a group of stocks selected by a fund manager. They are called “equity” because they provide you with a percentage equity ownership. This means you will profit if the companies you’ve invested in go up in value. Historically, equity investments have provided the highest long-term rate of return. The downside? Their short-term value can go up and down. The advisor who sets up your plan can help you determine the best mix of investments for your particular situation, based on:
- The age of the child you’re saving for. Equity investments can be a good choice for a younger child’s plan, as the money won’t be needed for a while and they provide the greatest opportunity for long-term growth. But they’re not so good for teens who have only a couple of years until college, since their short-term value can fluctuate. For older kids, fixed-income investments may be a safer investment alternative.
- Your personal risk tolerance. This is something only you (with the help of your financial advisor) can determine. You may be asked to complete a questionnaire to help determine a specific investment ratio that corresponds with your personal comfort level.
Simply put: Selecting a balanced mix of investments for an RESP, and working with a financial advisor to gradually shift the balance of investments from equity over to fixed-income as you approach the date when the funds will be withdrawn, can help ensure the plan will grow and the money will be there when it’s needed.