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How to Invest for Children

Investing isn't just for adults. Parents and grandparents can invest for their young relatives to help build a healthy nest egg and a good investment habit

Holly Black 5 September, 2019 | 9:06AM

abc

Parents and grandparents can set money aside for their children’s future from the moment they are born, but those hoping to build a decent nest egg for their young relatives need to pick the right investments.

Junior Isas have become a popular way for families to save for children, with 907,000 of these accounts opened in the 2017/18 tax year. The accounts launched in 2011, replacing Child Trust Funds, and are available to anyone under the age of 18.

Junior Isas

Parents and grandparents can invest up to £4,368 a year on behalf of their young relatives, with many doing so in the hope of helping their children pay university fees or for a deposit on their first home in the future. Some £902 million was put into Junior Isas in 2017/18, of which 52% was put into cash accounts.

But with such a long time horizon, relatives would likely be better using the opportunity to invest rather than leave the money languishing in cash accounts paying rock-bottom interest rates. 

Experts typically say that the longer you are investing for, the more risk you can afford to take on. This is because you have time to ride out any ups and downs in the stock market along the way. Those opening an account for a young child, who won’t be able to touch the money until age 18, have plenty of time on their hands.

This could make racier investments a worthy contender for a young person’s portfolios. Funds that focused on growth could help boost returns while contrarian options such as the ones we pick here could be a good option for those willing to go against the herd.

Choices for Children

Other options could include the Gold-rated Comgest Growth Emerging Markets fund, which invests in companies across Asia, Africa and Latin America. Top holdings include computer chip maker Taiwan Semiconductor and financial services group Ping An Insurance. While investing in these markets is riskier than focusing on developed economies, the potential for rewards can be greater as companies is emerging countries can grow at a faster rate. The fund has produced annualised returns of 7.2% over five years.

The Gold-rated Fundsmith Equity fund, meanwhile, provides a concentrated exposure to companies across the world. While the charges are high, Terry Smith’s flagship fund has outperformed significantly over the long-term, delivering annualised returns of 21.6% over five years. Smith’s investment philosophy is to find good names, not overpay for them and then “do nothing”. Top holdings including Paypal, Microsoft and Estee Lauder. Morningstar analyst Peter Brunt says it is “one of the strongest options for investors seeking exposure to high-quality global equities”.

Simpler solutions shouldn’t be overlooked, however. The Gold-rated Fidelity Index US Fund will provide exposure to the thriving US stock market for an annual of just 0.06%. The fund could provide a good core investment for growth over the long-term

Young investors might also like the idea of incorporating ESG factors into their investments. The Silver-rated Stewart Investors Worldwide Sustainability fund has a five globe Morningstar sustainability rating – the highest a fund can score. The fund looks for companies with sustainable business models and the ability to grow their earnings, focusing on those poised to benefit from the development of the companies in which they operate. It invests in companies across the world including Marmite-maker Unilever in the UK, German chemical company Henkel, and US tech company Cerner. The fund has delivered annualised returns of 12.4% over five years. Morningstar analyst Ronald van Genderen says: “We have long been fans of this fund, including its best-in-class research and a stable and experienced investment team.”

Options for Older Kids

Once a young person reaches age 18 their Junior Isa automatically becomes an adult Isa, with the full £20,000 annual allowance. While many parents fear that a child might spend the money in their Junior Isa once they can access it, research shows that very few teens choose to do this. Those who have been involved in the investment journey are especially likely to continue to invest their money.

At this point, young people might also consider opening a Lifetime Isa. This can be opened by anyone aged 18 to 39 and you can save £4,000 a year into the account, which the government will top-up with a 25% bonus. The appeal of these accounts for younger people is that the money can be used for a first home purchase – if you have already bought a home then the money cannot be accessed before age 60 without forfeiting the government bonus.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

About Author

Holly Black  is Senior Editor, Morningstar.co.uk

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