Best child trust funds and Junior Isas

But while it is easy to see the advantages of starting investing early, many parents are put off by dilemmas over which junior individual savings account (Isa) they should be saving into, and what investments they should include.

Another factor to bear in mind is that April 2015 money held in child trust funds (CTFs), the junior Isa’s tax-efficient predecessor, can be transferred into junior Isas. Patrick Connolly, a certified financial planner at Chase de Vere, says allowing CTFs to merge with junior Isas will give parents an opportunity to secure a better financial deal for their children.

The finer details of what can and cannot be transferred have not yet been announced, but for the tax year ending April 2015 anyone investing in either a CTF or Jisa can choose to put in up to £4,000 a year tax free.

Best junior Isa providers

Parents who want to invest in stocks and shares should look to the DIY investment platforms for their Junior Isa investments. A platform also allows adults access to less obvious assets, such as exchange traded funds. Popular platforms for Junior Isas include Hargreaves Lansdown, AJ Bell YouInvest, BestInvest, Alliance Trust Savings, Charles Stanley Direct, Fidelity and The Share Centre.

Shelley McCarthy, a chartered financial planner at Informed Choice, recommends an adult investor uses the same investment platform they use to manage their own portfolios. She says: "This keeps investments in one place, makes them easier to manage and to apply a consistent investment strategy."

Ms McCarthy recommends Fidelity FundsNetwork platform which charges 0.35 per cent a year on funds under management.

Danny Cox, a chartered financial planner with Hargreaves Lansdown explains that more active investors may want to weigh up the cost of using the platform versus the investment choice available.

Junior Isas - funds to include

What investments an adult includes in a Junior Isa or CTF will depend on their own risk profile and the time frame over which they are investing. Mr Connolly points out that someone investing for a child who would be over 10 years away from cashing in their Junior Isa might want to take more risk than someone who is investing for a 12 or 13-year old. However, he says most parents will be investing 10 years or more and so can afford to take a reasonable amount of investment risk.

Below we’ve listed some share-based funds that financial planners felt were the most appropriate choice for young investors.

Timescale: Five to 10 years

Consider: Schroder Multi Manager Diversity fund (GB00B60CZD52)

Cautious parents or grandparents might want to consider Schroder’s Multi-Manager Diversity fund. Mr Connolly says: "It is essentially being a whole portfolio in one fund. It invests about one-third in equities, one-third in cash and fixed interest and one-third in alternative investments such as hedge funds and commodities."

Or: HSBC FTSE All-Share Index fund (GB00B80QFX11)

This is a passive fund that aims to track the performance of the FTSE All-Share Index, so it is a way for youngsters to benefit from blue-chip UK stocks. Mr Connolly says: "It uses full replication of stocks for all of the major shares and has an annual charge of only 0.18 per cent."

Timescale: 10 years or more

Consider: Jump Junior Isa based on Witan Investment Trust (WTAN)

This is a diversified global equity trust using a multi-manager approach, 12 third-party managers have responsibility for the six underlying investment mandates. Mr Connolly says: "This approach has worked well and performance has been very strong." However with annual charges of £30 per annum plus VAT mean it is more suitable for those with larger funds of over £2,000.

Or: BlackRock European Dynamic (GB00B5W2QB11)

This is an aggressive bottom up stock picking fund for those happy to invest their child’s money on a high-risk basis. The fund is managed by Alistair Hibbert and has no benchmark as it seeks to find high growth under-researched companies. Mr Connolly says: "The fund was previously soft closed although now has some capacity and could reward investors in a region which is out of favour but where the central bank might soon take more decisive action, which could boost stocks."

Or: CF Woodford Equity Income (GB00BLRZQ513)

If you are up for giving your child’s cash access to one of the UK’s most successful fund managers this could be a home for it. The fund’s manager, Neil Woodford aims to invest in dividend players, such as Imperial Tobacco and Astra Zeneca, but the fund also invests in small caps and some listed on the Alternative Investment Market (Aim) which are more risky. Investing in the fund is cheaper through a platform.

Or: Newton Real Return (GB00B8GG4B61)

If you are confident about absolute return funds then this is a benchmark-unconstrained multi-asset fund, with a clear emphasis on the long term and capital preservation.

It is a transparent portfolio of individual single securities, so it has direct exposure to companies and securities, according to Mr Cox, but you have to be comfortable investing over the long term.

Child trust funds

Only a limited number of providers offer child trust funds, particularly stocks and shares based accounts. Those on offer tend to include an index tracking fund, but they come at a considerable cost which makes them rather unappealing for investors. For example, Ms McCarthy says the L&G UK Index Trust CTF charges 1.5 per cent but an investor can access the same fund directly for 0.56 per cent.

If parents are happy to manage their own investments, Ms McCarthy says that the CTF from Selftrade is a good option to consider. "This allows online access to a wide range of funds and investment options," she says. "It is fairly cost effective, although there are dealing costs and an inactivity fee to consider."

For a savings account CTF the Yorkshire Building Society currently offers 3 per cent interest, although this does include a 12 month bonus, so parents would need to shop around at the end of the term. Skipton offer a cash CTF paying 2.65 per cent, with no short-term bonus.

Jump Child Trust Fund (Witan investment trust)

As with its Jisa counterpart the CTF version has annual charges of £30 per year plus VAT

"For those with less than £2,000 to invest we usually prefer non child trust fund options," explains Mr Connolly.