Planning ahead
The Government's Child Trust Fund scheme may be relatively new, but the concept of a children's investment plan itself is far from unique, explains Nina Montagu-Smith
A little more than two years ago, the Government launched the Child Trust Fund. Offering £250 to every child born since September 2002, to be invested until they turn 18, the aim was to encourage families to save for their children.
But the idea of encouraging investment for children - perhaps to help pay for the costs of education, for buying that first car or setting up home later in life - is far from new. Children's investment plans have been offering people the chance to make stock market investments for children simply, conveniently - and affordably - for years.
The plans allow parents, or other family members, to invest in investment trusts and/or funds on behalf of a child and, even though children cannot hold shares in their own name, children's investment plans do make it easy to invest on their behalf.
One advantage of these plans is that they can offer affordable exposure to equities. If you put money aside early for your children, it could remain invested for 18 years or more and returns from dividends can be compounded through reinvestment. While many people still choose savings accounts with banks or building societies because they are less risky since capital is not at risk, stocks and shares have tended to perform better than cash over extended periods and are therefore more likely to beat inflation.
Chris Fletcher, head of Retail Investments at Baillie Gifford, says: "Regular long-term investment in equities from early in a child's life can have many advantages: potentially, it can reduce much of the strain of saving over the years by taking just a small portion of your monthly or annual income."
Investing small amounts of money on a regular basis can also help to smooth out the highs and lows that are encountered on the stock market because you buy more shares or units when the price is low and fewer when the price is high. This is known as pound-cost averaging. And investing in equities through pooled funds, such as investment trusts, unit trusts or open-ended investment companies (OEICs), can help to reduce risk. Vehicles such as these offer access to a wide range of equities, bonds and property investments, which are chosen by professional fund managers. Investing little and often might be the key to a nice tidy sum for when a young person may need it so, usually, the earlier you start saving for your child's future, the better.
The value of your investment and any income from it can fall as well as rise and you may not get back the amount invested.
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