Saving for house deposit through mutual funds

Oran A. Hall, Contributor

QUESTION:

I am a 26-year-old professional, recently married, with a new car payment, and other household expenditures as current debt.

I have found myself with J$500,000 to invest with the aim of building a deposit for a house in the near future. I also have the ability to save an additional J$60,000 towards the house deposit. I consider myself able to accept medium risk.

I have been doing some research into mutual funds, especially at Scotia and Sagicor. These look to have reasonable returns and are fairly safe with fair access to your money in case of emergencies. Kindly advise.

- Alvin

PFA:

You have mentioned that you have a sum to invest for making a deposit on a house you intend to purchase in the near future, that you have been doing research on mutual funds and that you can save an additional amount.

You have not been specific, though, in what you want to be advised about, so I will focus on investing in mutual funds to realise your goal.

There are several matters that should be clarified before we go further. You have set purchasing the house as a short-term goal but have not been specific about when you want to realise that goal. It would help to set a time so you can be more focused and be better able to determine how much to save in each time period.

You have mentioned doing research on mutual funds. I am quite certain that Scotia Investments Jamaica does market mutual funds - some Canadian, some US. I am also sure that Pan Caribbean Financial Services, a subsidiary of Sagicor, markets a very wide range of CI funds. Those are Canadian. I have confirmed that Sagicor Jamaica does not market mutual funds.

There is a wide range of these foreign-based mutual funds on the Jamaican market for persons like you who seem to have a preference for investing in the global market. From these, it is possible to create a portfolio that is suitable for a wide variety of needs and objectives, including hedging against depreciation of the local currency.

How did you determine that the returns were reasonable and that the funds were fairly safe? Am I correct in believing the additional sum you are able to save is on a monthly basis? It is quite true that mutual funds are liquid, meaning it is easy to convert them to cash. But is this good or bad?

In your case, I am not sure it is good. If you are saving to make such a major investment, you should not be harbouring thoughts of using any portion of those funds for an emergency. I suggest you set up a separate emergency fund.

A money market, unit trust or short-term securities would be quite suitable for that purpose. A separate mutual fund account could do as well.

Should you use mutual funds as the primary instruments to save to purchase your home? Low-yielding savings accounts do not seem very suitable. Fixed deposits and bonds are not much better.

Considering your description of yourself as being able to accept medium risk - however you determine that - mutual funds are reasonable for you.

It seems clear to me that you want a fair amount of capital appreciation and I believe it is better to get it from mutual funds than going directly into the stock market. Apart from being liquid, they are managed by professionals, which would relieve you of the day-to-day responsibility of managing the funds and doing the detailed research.

Being diversified instruments, they offer some risk protection, which is not to say that they are immune from the risk of losing value for you will agree that the prices of securities, more so those that are primarily for capital appreciation, do fluctuate.

As you prepare to buy your home, remember that, apart from the deposit, there are other expenses that you will be required to meet, preferably from your resources, and that notwithstanding all the virtues of mutual funds there is no guarantee they will give you the returns necessary to realise your goal in reasonable time.

Oran A. Hall, a member of the Caribbean Financial Planning Association and principal author of 'The Handbook of Personal Financial Planning', offers free counsel and advice on personal financial planning. finviser.jm@gmail.com.