COMMENT
What Should You Do With Your Child's £250?

Vouchers are now being sent out for the Child Trust Fund (CTF). This is the scheme that was announced in the Budget of 2003 that will give your child between £250 and £500, just for being born after September 1st 2002. (Read this earlier article for a full explanation.)

If you've got your voucher, you're probably all set to open your child's account for him, take advantage of the miracle of compounding, and make him the richest 18-year-old buying drinks on that beach in Ibiza!

Well, OK, maybe you can think of a better way for him to spend it (university fees, deposit for a house etc.), but the principle is the same – and that £250 needs to grow. Here at the Fool we like shares as long-term investments and the Child Trust Fund website also states that "when investing money for a long time, accounts that invest in shares almost always produce a better return than savings accounts. This is true for every 18-year period in the last 40 years". For the best potential returns, forget a savings account, you need the stock market.

With a CTF, you can either invest directly in shares or invest through a fund in a Stakeholder CTF. Stakeholder funds will be "lifestyled" meaning that, from the time your child reaches the age of 13, the fund will be gradually moved out of shares and into cash. This reduces the risk of it falling in value in the final few years before it matures, but also means it has slightly lower growth prospects than a fund that invests exclusively in shares.

Providers

The Child Trust Fund website has recently added a full list of providers and distributors – over 70 different places that have agreed to either provide or distribute CTF accounts.

Looking through the list, you may see a few familiar banks and building societies, even 'Boots the Chemist' are in there. However, if you're interested in investing in the stock market, you may be keen to use a unit/investment trust company that you know. But where are all the big fund managers?

Unfortunately, few investment companies seem keen to have anything to do with the Child Trust Fund, as the amounts involved are much lower than they normally deal with.

This, of course means less choice for you, the parent.

But there are still many to choose from, and a few things you can do to get the best deal.

1. Narrow down the type of account that you're interested in - you'll have to do some research as you would for any investment. Nationwide for example are providing an investment fund tracking the FTSE All-Share index, whereas 4TheKids offer a self-select option. F&C, one of the few big fund management names taking part, are offering monthly investment, into one, or more, of six investment funds, or a FTSE 100 tracker.
2. Look at the funds - you should also be given information as to where the money will be invested - important if you don't fancy your child's money funding companies involved in arms/tobacco etc. At the moment, only a few providers have provided details of their wares and you have to look at each of them in turn to see what they're offering. This is a cumbersome process but comparison tools are likely to become available in the coming months. As with mainstream investments, we reckon a cheap tracker fund will be the best bet for most people.
3. Aim for low charges – the stakeholder element of the CTF caps charges at 1.5%, but you may be able to find even lower than that. The lower the charges, the more (potential) profit for your child.
4. Mutual/Friendly companies - these may provide your child with 'membership rewards' from their profits each year – a small bonus.
5. Plan to add regularly to the fund. Remember, if you paid in the maximum £1,200 a year, your child could end up with over £33,900 when he/she turns 18 (this is assuming the fund grows at 8% a year and has an annual charge of 1.5%).
6. Open the account as soon as possible. The longer you wait (after April, when the money arrives), the less time it has to grow. And if you take longer than 12 months, the Government will open a Stakeholder CTF account for you – and you'll have no say with whom!

For more information take a look at the Child Trust Fund website and our Saving For Children centre.