At MoneyWeek, we publish a weekly round-up of share tips and a monthly digest of the top funds, trusts and stocks. But if you are thinking about investing for children rather than yourself, your investment strategy might look slightly different. With Christmas fast approaching, now could be a good time to give it some thought.
Your children’s list to Santa is probably as long as your arm – and of course it is always nice to have a few things under the tree to unwrap. But rather than going over the top this year and shelling out hundreds (or even thousands) of pounds on toys and gadgets, you could encourage your kids to think long term by buying them an investment fund – ideally in a tax-efficient vehicle like a junior ISA.
“Lots of parents and grandparents still default to cash gifts for their children or grandchildren – either in a savings account or some notes to pop in their piggy bank,” says Laura Suter, director of personal finance at AJ Bell. “But considering most children will have a very long time until they reach adulthood, investing can be a great option.”
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Although an investment fund might not come with a shiny ribbon, it could be the gift that keeps on giving in years to come. Even a small investment pot today could grow into something more meaningful over a number of years.
As we explored in a recent piece, putting £10 a week in a junior ISA (starting at your child’s birth) could see them amass over £12,000 by their eighteenth birthday, assuming 5% annual investment growth. Topping this up each Christmas could result in greater returns still.
Furthermore, a 5% average annual return is arguably a fairly conservative estimate. For context, the FTSE 100 index has delivered an annualised return of more than 6% over the past five years. Over the same period, the MSCI World has delivered an annualised return of almost 13%, while the S&P 500 has delivered almost 16%.
We share five investment ideas for children this Christmas.
Investment ideas for children
1. Low-cost global index fund
If you are a beginner, one of the best ways to invest is to buy a low-cost tracker fund which follows a global stock market index like the MSCI World or the FTSE All World. These give you exposure to thousands of companies all across the globe. This spreads the risk considerably, while allowing you to tap into the growth potential of a large number of markets.
Several providers offer exchange traded funds (ETFs) which track these indices, so you should pay close attention to fees when deciding which fund to go with. Suter points to the Fidelity Index World fund. This tracks the MSCI World with a charge of just 0.12% a year.
2. S&P 500 tracker
The US equity market has had a strong year so far, leaving other regions like the UK and Europe in its dust. Critics say the US looks expensive and that tech stocks could be creating a bubble, but others believe there is further to go.
Again, a tracker fund could be a good way to get some exposure to the US stock market at a low cost. The Vanguard S&P 500 UCITS ETF tracks the performance of 500 of the largest companies in the US. It costs as little as 0.07% a year.
Just remember that if you also own a global stock market index, you will already have a decent amount of US exposure. US stocks currently account for more than 70% of the MSCI World Index.
3. Investing in the domestic market
UK equities have been out of favour since Brexit, with UK funds experiencing large outflows in recent years, but some investors think that could be set to change. MoneyWeek columnist Max King looks at whether UK equity markets could be set for a bull run in a recent piece.
If you want some exposure to the largest companies in the UK, a FTSE 100 tracker could be a good option. These operate globally so are less exposed to headwinds in the domestic economy than other smaller companies.
Alternatively, if you are looking for a combination of large and mid-cap companies in the hope of greater long-term growth, you could opt for the FTSE 350 instead.
Vanguard offers a FTSE 100 tracker for as little as 0.09% – the Vanguard FTSE 100 UCITS ETF. Alternatively, you can buy the BlackRock’s FTSE 350 tracker through Hargreaves Lansdown for 0.16%. It is called the iShares UK 350 Index.
One final point to mention is that the UK market has a strong reputation for paying dividends, which can act as a useful boost to returns. If you are investing on behalf of a child (who doesn’t need any immediate income), opt for accumulating shares so any dividends are reinvested. This will allow you to benefit from the power of compounding.
4. Consider emerging markets?
Emerging markets (EMs) can come with greater investment risk, but Suter says parents might want to consider them if they have a long enough time horizon. She points to the JP Morgan Emerging Markets Investment Trust as one fund idea.
On the one hand, China (a key component in many EM indices) is currently out of favour, with growth having slowed against a challenging macroeconomic backdrop and prolonged property market crisis. More broadly, high interest rates can also create headwinds for emerging markets.
Nevertheless, having a small allocation to an EM fund could add diversification to your child’s overall portfolio, as emerging markets often outperform at different times to developed market equities. Over the long term, you could also benefit from the growth potential generally associated with developing economies.
“Run by a fund manager with three decades of experience, this trust invests in around 70 large companies in the emerging markets,” Suter explains. It costs 0.79% a year and has exposure to markets like India, Taiwan, China, and more.
5. Premium Bonds
If you aren’t comfortable buying an investment fund for your child, you could consider Premium Bonds instead. They are more of a savings tool than an investment, and are 100% backed by the government. This means your money is completely safe.
Premium Bonds don’t pay regular interest. Instead, bondholders are entered into a monthly prize draw where they can win prizes worth up to £1 million. The odds of winning a prize are currently 22,000 to 1 for every £1 bond you hold. The more money you hold in Premium Bonds, the greater the odds of winning.
The downside of Premium Bonds is that you aren’t guaranteed to win anything at all. From January’s draw, the prize fund rate will be 4%, meaning you could potentially earn a greater return from a normal savings account. Furthermore, while your savings are 100% protected from capital losses, they aren’t protected from the quiet spectre of inflation.
That said, Premium Bonds could also be a good option if you have already maxed out your child’s £9,000 junior ISA allowance, as the winnings are tax-free. Checking whether you have won anything in the monthly prize draw can be exciting too, and something your kids will enjoy.