Time to invest in your kids' future
Investing over the long term for your children can seem like a daunting task for young families who might be more preoccupied with paying the mortgage and energy bills. Yet those who can squirrel away money early will see their children benefit from – hopefully – strong returns from the stockmarket over time.
And if you want your children to have a more fulfilling life than your own, with fewer money worries and greater financial security – it makes a lot of sense to help them on their way.
Even if you can only afford to save small amounts, it could make a huge difference to your child later on. Provided you start saving and investing when your children are very small, the biggest costs you could face – helping with your child’s university fees, providing a deposit for their first home and possibly paying for a wedding – are a long way off.
The alternative is to face a whopping bill for university at a time when you have no access to large lump sums. With universities now able to charge up to £9,000 a year in tuition fees – and that sum likely to increase considerably
in the next 18 years – investing for your child today is a far smarter move than leaving it until tomorrow.
Time is on your side, so you can afford to take greater risks with your cash than someone who needs to get their hands on any investments quickly.
But there are a number of different ways you can invest for a child. Here, we outline some of the most common potential routes to riches.
Most beginner investors choose to pool their cash with other investors and invest in a fund that will itself invest across a wide range of companies, sectors, countries and, often, other funds. By doing so, they do not put all their eggs in one basket and thus reduce the risk of their investment falling in value.
These are called collective funds – and there are thousands of them. There are two main types of collective fund: investment companies, also known as investment trusts, and unit trusts or open- ended investment companies (OEICs).
OEICs can create an unlimited number of units, the price of which goes up and down in line with the underlying assets. In contrast, investment trusts have a limited number of shares, the price of which goes up and down in line with demand, separate to the value of their underlying assets – referred to as the net asset value.
Maike Currie, associate investment director, Fidelity Personal Investing, says: “It doesn’t matter if you’re investing for yourself or your child, it is important to always pay special attention to the issue of diversification. For example, the Fidelity Multi Asset Income fund invests in a broad range of assets such as bonds, equities, infrastructure, property and cash and aims to generate a sustainable income of 4% to 6%.
“The longer your child’s investment horizon, the more beneficial it may be to own higher return but riskier assets as there is still time to ride out the ups and downs of the market. For a newborn or toddler, emerging market funds offer the potential to tap into the superior long-term growth prospects of the developing world. Examples include the JPM Emerging Markets Fund, managed by Austin Foray and Leon Eidelman.”
Parents who do opt for stockmarket-based investments do need to keep an eye on the time frame, especially if it is needed for a specific purpose such as university fees.
Open-ended investment companies are hybrid investment funds that have some of the features of an investment trust and some of a unit trust. Like an investment trust, an Oeic issues shares but, unlike an investment trust which has a fixed number of shares in issue, like a unit trust, the fund manager of an Oeic can create and redeem (buy back and cancel) shares subject to demand, so new shares are created for investors who want to buy and the Oeic buys back shares from investors who want to sell. Also, Oeic pricing is easier to understand than unit trusts as Oeics only have one price to buy or sell (unit trusts have one price to buy the unit and another lower price when selling it back to the fund).
Net asset value
A company’s net asset value (NAV) is the total value of its assets minus the total value of its liabilities. NAV is most closely associated with investment trusts and is useful for valuing shares in investment trust companies where the value of the company comes from the assets it holds rather than the profit stream generated by the business. Frequently, the NAV is divided by the number of shares in issue to give the net asset value per share.
An interchangeable term for shares (UK) or stocks (US). Holders of equity shares in a company are entitled to the earnings and assets of a company after all the prior charges and demands on the company’s capital (chiefly its debts and liabilities) have been settled. To have equity in any asset is to own a piece of it, so holders of shares in a company effectively own a piece proportionate to the number of shares they hold. (See also Shares).
Generic, loosely-defined term for markets in a newly industrialised or Third World country that is in the process of moving from a closed economy to an open market economy while building accountability within the system. The World Bank recognises 28 countries as emerging markets, including Argentina, Brazil, China, Czech Republic, Egypt, India, Israel, Morocco, Russia and Venezuela. Because these countries carry additional political, economic and currency risks, investors in emerging markets should accept volatile returns. There is potential to make large profit at the risk of large losses.