- Parents with savings set aside for their children
- Junior ISA
- Long-term investment horizon
Setting up a Junior individual savings account (Isa) is a wonderful thing that you can do for a child’s future. You can put up to £9,000 per year (as of 2020/21 HMRC rules) in this tax-free wrapper for each child under 18.
Because children don’t have regular outgoings or financial commitments and won’t need the money for several years (the younger you get investing, the better), you can use higher risk assets to drive higher returns. That said, if your child is likely to want to use the savings set aside for them to fund higher education, traveling or a house, it is worth keeping an eye on the time horizon and adjusting the portfolio to a more cautious asset allocation before they need the money.
As well as investment returns, your child’s Junior Isa is a chance to teach them a valuable life lesson about risk and managing their money. Investing their money is a great way to help kids brush up on their maths, geography and science; and learn how the world works.
What to put in a Junior ISA
Equities – 60-75%
Your child can invest in a lot of equities as they are unlikely to be forced to sell out when markets fall and crystallise any losses. Using this allocation to buy interesting funds can help them learn about different regions, new technology and how companies work and drive the economy.
Fixed income – 0-15%
If you want to use a Junior Isa to teach your child about the variety of possible investments, fixed income should form part of the portfolio. Higher yield funds can also provide decent returns over the longer term and help protect the portfolio from severe downturns.
We have a maximum 15 per cent allocation to bonds, so your child has a large enough allocation to have a split of different types of bonds and learn how this important asset class works.
Other – 20%
We are assuming this category includes investment in higher risk assets including investment trusts with high private equity exposure. Private equity or venture capital is increasingly being used as an exciting way to invest in companies in the earlier stages of their development (many companies especially in the technology space are choosing to join the market later). But these assets are higher risk and can be harder to sell, which is why they are more appropriate for long term investment.
Cash – 5%
You could make the case that there is no need for cash in a child’s portfolio. It is far less important for them to be able to cushion risk than it is for an adult. We have 5 per cent in cash to reflect that the portfolio is an evolving thing and hopefully your child is learning as they go.