We often hear investors say that time in the market beats timing the market every single time. And who are better placed to take advantage of time in the market than minors? After all, compound interest has been labelled the eighth wonder of the world.

My daughter is the reason why I actively started investing 14 years ago. I invest on her behalf in her name as well as in my own when it comes to international transactions. But before we dive into the available options and methods, I first want to highlight three major considerations that should be top of mind when wanting to invest on behalf of a minor.

Financial education

Handing an investment portfolio to a financially illiterate 18-year-old is irresponsible and a recipe for disaster. That’s why it’s critical to continuously invest in your child’s financial education. Teach them about debt, budgeting, interest, stocks, taxes and the like at age-appropriate times.

Tax implications

Individuals are allowed to transfer/gift/donate R100,000 in any given tax year. Anything above R100,000 is considered a donation and will be subject to 20% donations tax in the hands of the parent.

Taxes such as CGT on profits or interest income will be taxed in the hands of the parent unless the child is registered for tax, which is unlikely.

Know your why

Why are you investing on behalf of your child? Someone once said that our children need us more when major life events happen, like when they buy their first car or house, their wedding day or when they have a baby – yet we only focus on getting them education policies.

So, what are your options?

There are various products you can invest in on behalf of a minor.

Tax-Free Savings Account (TFSA)

With a TFSA account, you pay no tax on dividends, interest, or capital growth, making this the best option for long-term goals. Optimising an investment portfolio to minimize future tax is non-negotiable.  The account does come with restrictions, with the most important being the maximum contribution threshold of R36,000 per tax year and R500,000 over the account holder’s lifetime. If you exceed these limits, you will be liable to pay a penalty of 40% on any amount you invested above the maximum threshold.

SARS also structured this vehicle to be as low risk as possible, that’s why one can only invest in ETFs – not single stocks.

It’s important to note that if you invest in a TFSA in a minor’s name, the contributions will form part of their lifetime limit and cannot be replaced once they are withdrawn.

Unit trusts

You can also invest in unit trusts on behalf of a minor in their own names.

A unit trust is a regulated investment vehicle that pools together the funds of many investors. A professional investment manager then uses the pooled money to invest in a selection of underlying assets according to the unit trust’s investment objectives. Because it’s actively managed, unit trusts often come at a higher management fee.

Local individual shares

South African minors are allowed to buy shares on the JSE in their own names. From the moment they have a birth certificate, they can start investing in companies like Shoprite, Anglo American, Capitec and more.

If you want to start small, micro-investing is the best option to get going. Here you can invest as little as R50 per month with apps like Liberty Stash or EasyEquities.

International individual shares

The South African Reserve Bank’s regulations stipulate that minors aren’t allowed to trade in foreign currency. That’s why I trade on behalf of my daughter. I will transfer the shares to her name when the time is right and will take into account the tax implications.

Many of the companies my daughter knows, and loves, are American. To get her excited about the stock market, I let her choose some of the companies she believes in (even if she’s wrong, she will learn a lesson). So, when you see me posting about Nike, Disney or Starbucks, just know that a 10-year-old chose them. 

Conclusion

Building a portfolio for my daughter is my generational wealth gift to her. Teaching her about personal finance principles will ensure that generational wealth does not end with her. This is simply the first chapter of the journey – and mom gave her a head start.

Rochelle Warries is a qualified chartered accountant with 16 years of experience and a seasoned stock market investor. Her passion is helping novice investors build healthy investment portfolios through financial education.

She is founder of Soul Financial, a website offering financial education and coaching. You can find her on Twitter: @soulfairy3