Ignoring the stock market could cost your child £21,200

CAUTIOUS parents who leave their children’s savings languishing in cash could be missing out on thousands of pounds.

Figures compiled for Money Mail reveal families saving into taxfree children’s accounts over the past 13 years could have made up to £21,000 more by investing the money in the stock market, rather than cash.

Parents looking to save for children aged under 18 today can open a taxefficient Junior Isa.

These allow family and friends to contribute up to an annual limit, which is £4,260 this tax year.

In 2011, Junior Isas replaced Child Trust Funds (CTFs), which had been on offer since 2005. These initially allowed parents to save up to £1,200 taxfree each year, but this has increased to £4,260.

Both allow savers to invest money either in cash or the stock market.

If someone had put £1,000 into a typical savings account every year since 2005, their nest egg would have been worth £14,355 at the end of September, according to figures from investment firm Fidelity.

Yet if they had invested the same amount into the FTSE All Share Index, their cash would have grown to £25,314 — an extra £10,959.

If a family had invested the full Child Trust Fund and Junior Isa allowance each year (£39,008, including the free £500 government voucher from the CTF scheme), they would have made £60,795 through investing, compared to £39,591 in cash — £21,204 more.

‘Shares can significantly outperform cash over the longterm,’ says EmmaLou Montgomery, the associate director at Fidelity Personal Investing.

‘You don’t need to be too cautious too soon because there is plenty of time to recover from lumps and bumps.’

Another problem with cash is that its value tends to be eroded by inflation. As Laura Suter, personal finance analyst at online broker AJ Bell, points out: ‘You could have a cash Junior Isa paying perhaps 3.5 pc. But when inflation, currently running at 2.7pc, starts eating away at that, shares begin to look more compelling.’

Despite all the disadvantages, 61 pc of Junior Isa savers still choose the cash option, according to official figures.

So, where should parents start if they are looking to dip a toe into the stock market?

Much depends on how much you have available to invest and how long there is until the child reaches 18.

Ms Suter believes that funds, which spread risk by investing in many different companies, are a better option than single shares. She suggests that a global tracker fund, which follows the ups and downs of a particular stock market index, would be a good starting point for parents.

Tracker funds (socalled passive investments) are run by computers, so they are cheap and easy to monitor. Ms Suter likes the Fidelity Index World Fund and iShares Core MSCI World ETF.

Both funds hold shares in Apple and, over five years, have turned a £10,000 investment into £19,086 and £18,929 respectively.

At online investment specialist Bestinvest, managing director Jason Hollands agrees that opting for an international fund is a good idea.

But he notes that, while tracker funds can be convenient ‘file and forget’ options for the timepressed, they are restricted to the growth (or loss) of the index. An ‘active’ or humanrun fund, with the right manager in charge, can sometimes generate better returns. Mr Hollands likes the international Fundsmith Equity and Lindsell Train Global Equity funds as decent ‘onestop shop’ solutions.

One of Fundsmith’s biggest holdings is PayPal, while Lindsell Train is invested in Unilever and Nintendo. Over the past five years, they have turned a £10,000 investment into £25,885 and £25,756 respectively.

Ms Montgomery, at Fidelity, says that the highgrowth economies of Asia, such as China and India, are higherrisk, but could offer greater returns.

She prefers to approach these economies through a diversified regional fund, such as Merian Asia Pacific.

It invests in highfliers such as Samsung and Chinese internet firms Tencent and Alibaba, without the risk of being concentrated in a single country. In five years, it has turned £10,000 into £18,203. However, Ms Suter warns that higherrisk areas should only make up a small portion of your overall investment.

It’s also worth noting that the stock market returns of the past decade have been bolstered by the global recovery from the 2008 financial crisis, so future investor profits may be lower.

Experts agree at least five years is necessary for a stock market investment. So, if your child is 13 or older and plans to take the money when they turn 18, you may prefer to stick to cash.

For a lowerrisk option, Mr Hollands recommends Invesco Global Targeted Returns and Threadneedle Dynamic Real Return. They have turned £10,000 into £11,596 and £12,855 respectively over the past five years.