The RESP can be like a Money Tree for parents (and children) wanting to save for post-secondary education. If you invest your money you can get:
- A CESG payment which can be up to $1000 a year (if you deposit $5000 that year)
- If you are low enough income, you might get a Canada Learning Bond (CLB)
- The A-CESG ( Additional Canada Education Savings Grant) is also available for lower income
All of this free money is there for the asking. Truly it is like having a Magic Money Tree, however, as with all orchards, you can lose some of your fruit due to worms.
In this case the worms can be:
- High MER (Management Fee) Mutual Funds, many of the time they are hidden under the guise of Balanced Funds.
- Badly performing Mutual Funds, usually pushed by an “Investment Person” who is making money on the purchase.
- Very low interest paying saving devices (e.g. Bond Funds, Money Market Funds, GICs and HISA).
These financial worms chew into the potential growth of your RESP. Remember that most RESPs can have about a 23 year lifespan. The government stops adding money after the child turns 18, but the money can continue to grow for a while after that, unless the worms get in there.
When I opened my kids’ RESPs (more than 23 years ago), I didn’t know much about investing, so I spoke to my Canada Trust “Investment Person”. This person warned me that this was a short-term investment, where I didn’t want to risk losing money, so I should put the funds in safe Mutual Funds. I didn’t know so that is what I ended up getting was a small amount in a Balanced Mutual Fund (MER 2.8%) a larger amount in a Bond Fund (paying 1.2%) and a Money Market Fund (which paid 0.9%).
As time passed, I learned more about investing, and started looking at my TD Mutual Funds (CT had been bought by TD), and saw the High MER I was paying. I read about the E-series Funds from TD, saw they had low MERs, so I went to TD to ask how to transfer to these Mutual Funds. You would have thought I was about to fall into an abyss, the way the investment person reacted, but I was not to be dissuaded. I got all the needed forms and changed the RESPs so that I could purchase the E-series funds.
I changed my investment mix, to be more like my other Index Fund portfolios, while still holding all grant money in safe(r) funds (i.e. Money Market funds). I didn’t want to lose the grant money, so I figured they were safe in a Money Market fund (which is wrong, Money Market funds can lose value too).
I lost a great deal of possible growth during that time, to High MER funds and badly chosen Mutual funds as well.
Don’t let the worms eat away at the growth of your RESPs.BCM 2020