There is a common misconception that investing for children is the preserve of wealthy parents.

It’s actually possible to build a decent-sized nest egg by saving small amounts of money each month into a stocks and shares Junior ISA.

If you invest £30 a month from birth, your child could benefit from a pot worth £10,169 by the time they reach age 18, assuming an investment return of 5% a year after charges.

Investing £50 a month could produce a pot worth £17,723, while investing £100 a month could grow to £33,896, according to figures from AJ Bell.

This money could be hugely beneficial for a child going off to university or buying their first home.

WHAT’S THE BEST INVESTMENT VEHICLE TO USE?

A stocks and shares Junior ISA enables you to invest money for your child in a tax-efficient way.

You can invest up to £4,128 this tax year and up to £4,260 in the 2018-19 tax year. There is no tax charged on the income or capital gains earned.

The money can’t be accessed until your child turns 18, at which point it converts to an adult ISA. Your child is then free to withdraw some or all of the money or continue to invest.

‘For this reason some people feel Junior ISAs are a great way to encourage long-term savings habits for their children who can, hopefully, see how saving and investing can make money work harder than holding cash or spending it,’ says investment consultant Roland Kitson.

HOW DO I OPEN A JUNIOR ISA?

You can open a stocks and shares Junior ISA with an online investment platform.

Many platforms have a regular investment service, which lets you set up monthly payments starting from just £25 a month.

The fees associated with regular investing are typically lower than with ad-hoc investing.

For example, AJ Bell Youinvest’s Junior ISA charges £1.50 for buying and selling shares via regular investing, compared with £9.95 for ad-hoc dealing. Buying and selling funds costs £1.50 in either instance, and there is a 0.25% annual custody charge.

IS THERE ANY POINT INVESTING SMALL AMOUNTS?

Investing little and often can turn into a decent-sized pot surprisingly quickly, particularly if you reinvest dividends.

In fact, evidence suggests regular monthly investing performs better than making large one-off or ad-hoc investments. This is because you smooth out the ups and downs of the stock market.

You buy more shares or fund units when prices are low and fewer when prices are high.

Simon Edelsten, manager of the Artemis Global Select Fund (GB00B5QKCK29) and Mid Wynd International Investment Trust (MWY), says regular investing avoids parents having to worry about what the markets are doing. It ensures units continue to be bought after market falls, when the opportunity is often greatest.

‘It can also be a good way of demonstrating to children the discipline and benefits of regular saving,’ Edelsten adds.

WHICH INVESTMENTS SHOULD I CONSIDER?

When you’re investing for children you typically have a long investment time horizon, which means you can afford to take on risk.

History shows equities have the potential to deliver the strongest returns over a long period. However, to ensure a less bumpy ride it’s important to have some diversification in your portfolio.

Funds such as unit trusts or investment trusts can be good ways to achieve diversification.

WHERE DO I START?

Building a passive core in your child’s portfolio can be a good starting point. You get broad market exposure and can add more opportunistic holdings alongside it.

Ryan Hughes, head of active portfolios at AJ Bell, suggests opting for Fidelity Index World (GB00BLT1YP39), which tracks the MSCI World Index, giving exposure to the biggest and best-known companies in the world.

If you’re comfortable taking on a little bit more risk, Hughes reckons Liontrust Special Situations (GB00B57H4F11) is a solid option. The actively-managed fund looks to identify companies that have a sustainable competitive advantage. It’s typically biased towards medium and smaller companies.

If you want a higher level of risk, investing in emerging markets such as China and India could be a good option, for example through Fidelity Emerging Markets (GB00B9SMK778).

‘These markets offer the potential of faster growth over the long term but often come with higher risk. That said, when investing over a long period and on a monthly basis, some of this risk can be reduced,’ explains Hughes.

Roland Kitson reckons parents should consider investments that take a long-term view. He likes Impax Environmental Markets (IEM), an investment trust that invests in companies providing solutions to current and future environmental challenges.

‘Because of its focus on mitigating and adapting to the effects of climate change, IEM can appeal to those who want to offer children the best personal future in more than just the financial sense,’ Kitson says.

Another investment trust worth taking a look at is Scottish Mortgage (SMT). Favoured by the experts at Seven Investment Management and European Wealth, it invests in a global portfolio of businesses with above-average historical returns.

‹ Previous2018-02-22Next ›