FOOL'S EYE VIEW
Get A Tracker For Your Kids

By Jane Mack (TMFJane)
January 16, 2003

About ten months ago I took out an index tracker for my baby niece. Not having children of my own I got a bit excited about the arrival of a baby in the family and I wanted to do something for her.

It's not exactly a mega sum of money – after all, I've got my own future to think about - but I put up a lump sum of £100 and started adding £25 a month. I've just had a statement through to tell me how it's doing and it makes for interesting reading as it really brings home the concept of 'pound cost averaging'.

People always worry when the stock market bombs because they think they're losing money. Well, they are, I suppose, but there are compensations when the market is low and you've got time on your side. Every time you buy into an index tracker on a monthly basis, you're essentially buying a few shares each time. When the market is high, the shares are expensive; when it's low, they're cheap so by buying on a monthly basis you're spreading the risk.

For example, last June, each share in my niece's tracker cost 48.62 pence to buy whereas in October, they only cost 37.83 pence. Clearly she's lost money on my June purchase but as the cost of each share went up to 41.16 pence in December, she's made a little on my October purchase.

So far, I've paid in £300. My first £150 bought only 289 shares whereas my second £150 bought 361 shares. In financial terms I've lost money because the market's fallen. My investment of £300 is now only worth £267.55 including charges – but I have been able to acquire more shares for my money. I have no doubt that in 10, 20 or 30 years time, the value of the tracker will have increased – they always have over the long-term. So, hopefully, by the time my niece gets to adulthood and we sell up, there will be a nice lump sum for her to play with.

Actually, although this little fund is for my niece, it's not in her name. Usually, you'd put the child's initials after your own name to indicate that the fund belonged to the child and that you were simply acting as guardian until they reach 18.

However, her parents felt a bit uncomfortable with the idea of their daughter being given such special treatment and, anyway, when we discussed the pros and cons, we came up with some other considerations.

For example, if they or my other brother produced any more sprogs, I would presumably feel that I had to set up something similar for them. What if I ended up feeling obliged to finance individual funds in equal measure for something the size of the Von Trapp Family? (Good point!)

What would happen if I really needed the funds for myself in later years?  

Also, if the fund was in her name, I'd be legally obliged to hand over the money the moment she reached 18, something that would go deeply against the grain if she had not yet learned to be responsible with money. (Another good point!)

So it was set up in my name. I will have to be responsible for any Capital Gains Tax considerations, if any, but as I'm aware of the implications, I shall watch out for them.

Actually, it's a good job, we did set it up this way. My niece has just acquired a baby sister and, although I will increase my monthly contribution slightly, I have decided that I won't double it. I shall divide the pot between any nieces and nephews that I might have when the appropriate time comes – and that won't be for at least 20 years.

In the meantime, I'm quite happy that the market is fairly low at the moment because I'm squirreling away more shares for each and every one of them.

More: All About Index Trackers | Investing for Children