Financial Answer Center

There are several different investment vehicles to consider when you make investments for your child's college fund. In the interest of diversification, you may invest in more than one vehicle. Which vehicles you choose will depend on your ability and inclination to manage large sums of money, your tolerance for risk and how close you are to actually needing the money to pay for college. (See the section Developing a Funding Strategy.)

Individual stocks rise and fall in value depending on the financial health of the company that issues them; they may or may not pay dividends. Bonds are known as fixed-income investments because they pay a set amount of interest at regular intervals. Mutual funds are available across the whole spectrum of risk and return, and are good vehicles for diversification because your dollars are invested in a number of companies all at once.

As you look at how much you anticipate your college investments to be worth when you cash them out, remember to take into account the tax impact of capital gains. With most investment vehicles, any increase in value will be taxable at the time you take the gain.

Savings bonds make sense for conservative investors, and may have tax advantages, especially if you redeem them in the year in which you pay your child's college tuition.