Saving and investing on a child's behalf ranks fairly high on individuals' investing to do lists, particularly those of parents and grandparents. To help facilitate this, the government is planning to replicate the ISA model and roll out new investment products known as 'Junior ISAs' that will replace the Child Trust Fund scheme and hopefully provide a popular way to save for your children's future. But why restrict your child or grandchild's role to that of recipient? The earlier you engage them in financial decisions and teach them about the importance of saving for the future--whether it be milestone goals such as a deposit for a house or even retirement, or more achievable goals such as a dream holiday or birthday present--the more effective they're likely to be in managing their finances and investments later in life.
Making the Most of 'Junior ISAs'
There are a number of important differences between the CTF and the Junior ISA regimes, and some key details are still to be confirmed, but initial reactions to the government's plans are generally positive.
Junior ISAs will simply be a tax-free wrapper in the same way as an 'adult' ISA. Though the maximum annual allowance is yet to be announced, Junior ISAs should provide an additional avenue for saving on top of the £10,000+ that each parent can currently save per year. Of the details that have been unveiled so far, we know that Junior ISAs should come into existence this autumn and that the child won’t be able to access the funds until they are 18--in time for paying those ever-increasing university fees. Most funds, both OEICs and closed-end/investment trusts, are now ISA-eligible and many allow regular monthly payments of as little as £50, enabling you to take advantage not only of pound-cost averaging but also of compound returns.
Recent figures published by Fidelity International show that investing just £50 per month in a fund that grew by 6% and had a management charge of 1.5% a year and no initial charge, after 10 years would generate a savings pot to the tune of more than £7,500. An additional 10 years would lead to almost £19,500.
Teaching Children to Do It Themselves
Here at Morningstar, we have often emphasised how important it is to start investing early in life. Not only does it give you a big head start in building a nest egg for university, a first home, or retirement, but learning good investing habits early on can have a big positive impact for years. This is why we believe it is an excellent idea for parents to teach their children about money and investing from an early age.
Funds, because they offer one-stop diversification, can be an excellent way for older children and teenagers to learn the value of investing. Of course, not all funds are suitable for young investors, but with a little thoughtful research it's possible to find some that children can feel at home in.
Broadly speaking, when helping the young people in your life invest in funds, it's best to keep things simple. Focus on equity funds rather than bond funds, because children have very long time horizons and can take on plenty of risk. Large-cap stock funds are generally best; not only should they form the core of any long-term portfolio, but they're more likely to hold stocks of which the children have heard, making it easier for them to identify with.
With the explosion in popularity of ETFs, there is now a huge range of these funds that track all manner of weird and wonderful indices. Perhaps in order to engage the interest of your child, particularly when they're very young, you may want to let them allocate a small proportion of their portfolio to an investment that interests them in addition to their core fund. Parents of Buzz Lightyear and DreamWorks fans might find themselves in the market for an ETF tracking the aerospace and defence industry or a Madagascar equity fund. You never know--such niche players could pay off, and if they don't then your child has learnt a valuable lesson about the risks of making emotional investment decisions.
Young investors generally don't have a lot of money to throw around, so a fund that requires substantial up-front payments is effectively closed to them but there are plenty of funds with relatively small minimum initial investments, making them much more welcoming for beginners. You can use Morningstar's Fund Screener to find funds with low or zero minimums by selecting the relevant criteria under Fund Fees and Purchase Details.
