Get your child off to a good start

Published by Sonia Speedy on 11 December 2007.
Last updated on 23 August 2011

Child holding ballons

With the ever-rising cost of education and first-time buyers struggling to get a foot on the property ladder, more parents are being called upon to help their offspring get ahead financially - something investment trusts can help to achieve. Being a share-based investment, investment trusts make an excellent long-term savings vehicle for parents keen to build up a tidy nest-egg for their child.

"If you're investing on behalf of a child, that's what you've got - the long-term,' says Sherry-Ann Sweeting, marketing manager for the Scottish Investment Trust. "If you're starting when a child is born you're looking at 18, 20 or even 25-years perhaps, depending on what the goals are when you start investing."

This long-term approach has its advantages, as Richard Wallis, deputy head of research and investment at IFA firm Origen, explains. "When you take a child into account, because of the very long time period, you can ride out the downsides in the market and hopefully benefit more from the upswings," he says.

Research by the Association of Investment Companies suggests that students and parents alike often underestimate the true cost of expenses such as university education. It suggests many students may graduate with over £5,000 more debt than they were expecting, illustrating just how important it is to plan ahead.

Low charging structures

Investment trusts offer parents the same advantages as they offer any other investor - including the benefit of pooling your money with other investors to get economies of scale and providing the opportunity to invest in a wider variety of shares than an individual is likely to be able to achieve on their own.

"The fact that they've got lower charging structures than most other funds is another advantage," says F&C Investment Trust manager Jeremy Tigue. "Because you've got more money working for you - you're not having your returns taken away or reduced by high charges," he says.

He adds that the fact many investment trusts have been around for many years and "have survived lots of worse market situations than we are in at the moment" and still prospered, makes them ideal investments for children.

The flip side is the added risk created by an investment trust's ability to borrow, or 'gear', along with the added volatility that goes with investing in a company that is listed on the stockmarket. But investing for a longer term - such as 18 years - can help to balance these risks out.

"It does need to be pointed out that it is an equity investment and that markets can fall as well as rise," Sweeting says. "If you put your money in a bank or building society account, the capital is secure, whereas with market volatility that may not be the case with an investment trust because it is an equity investment."

Monthly investment is often best

Children under the age of 18 are not able to hold company shares in their own name, but parents can invest on their behalf through an investment trust savings scheme, by 'designating' on the application form that the shares are for the child. Otherwise, a parent can hold the shares in what is known as a 'bare trust' for the child. The option of making regular payments from as little as £20 a month into an investment trust is available, along with the ability to invest lump sums.

"You're generally better off investing on a monthly basis rather than investment lump sums on an ad hoc basis," says James Saunders Watson, head of sales and marketing for investment trusts at JP Morgan Asset Management. "Markets do rise and fall, therefore a parent who puts away from as little as £50 a month for their offspring - or less than the cost of a takeaway coffee each day - will not have to worry about trying to time the market, especially in an unstable period."

When it comes to choosing which investment trust is most suitable, although some are marketed specifically for children, all investment trusts can be used for this purpose via a bare trust or a designated account. Richard Wallis says there are a wide range of sectors that parents can invest in through investment trusts, from the traditional global growth style investment such as those of Witan and F&C, through to more specialist areas.

He suggests making use of the more general funds, which offer a wide diversity of investment, or - depending on the amount of money being invested - parents could go for a couple of UK-based investment trusts, putting other 'satellite' funds around it. However, this may require more management.

Parents can also move to decrease the amount of risk an investment contains as the child grows older and gets closer to needing the money - be it to pay for a wedding, a deposit on a house or an exotic gap year.

Dane Halling, principal at Hampshire-based IFA firm Arcturus Investments, also suggests parents should steer clear of fashion when it comes to investing for their child. "One habit investors should break is the following of investment fads. For longer-term investing, particularly for children, if one can avoid that then you're avoiding one of the major pitfalls," he says.

Halling believes investment trusts should not be the only investment in a parent's investment portfolio for their child, but says it can play an important role. "My broad approach would be to look at a good handful of vehicles of this type. This wouldn't be the entirety of an investment portfolio, but certainly a significant part of it, filled with top-notch investment managers where there is a pretty good chance that they're going to be doing the same job in 10 years' time. And that is very different from much of the unit trust world," he says.

As Adrian Shandley, managing director of Southport-based Premier Wealth Management, confirms, investment trusts offer some clear advantages for those wanting to give their children a financial head start. "With low charges, independent guardianship, tax advantages and the ability to make investment decisions free of investor sentiment - and low minimum entry levels - investment trusts offer an ideal home for investors wishing to save over the long-term for children or grandchildren alike," he says.

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