FOOL'S EYE VIEW
Introducing Kids To The Stock Market Rollercoaster

Back in 2001, my brother and his wife were kind enough to provide me with a niece who proved to be such a delightful baby that on her first birthday, I started a small investment fund for her future.

My plan was to invest a lump sum of £100 and then £25 a month thereafter into a cheap and simple index tracker. It would be in my name but marked with her initials - to ensure that the tax man knew it was actually her money and not mine. I would simply be a trustee investing on her behalf and it would mean I could also use her own Capital Gains Tax allowance should my investment grow to such an extent that it would be helpful to take advantage of.

As it happens, her parents asked me to invest the money entirely in my own name - their logic being that at some point over the next couple of decades I might actually need the money for myself and it would be a shame if I couldn't draw on it if I needed too. In fact, they insisted on it and I can see their point. Nevertheless, it's my intention to hand over the fund to my niece when she's 18 or 21 or, indeed, whenever I think she's ready to handle what should amount to a tidy little sum of around £10,000 in real terms by the time she reaches adulthood.

So, am I on track? Hmmm....that depends. My total investment so far of £925 currently stands at £1,093.48 precisely (with dividends re-invested and annual charges at just under 0.5%). It's not exactly an impressive growth rate but then two and a half years is a very short time span to evaluate it and I'm aware that the stock market is still recovering from the massive trough it fell into following the FTSE 100's peak in December 1999.

The timeline goes something like this:

• December 1999 - FTSE 100 peaks at 6,930
• March 2002 - FTSE 100 stands at 5,271 (when I started the index tracker)
• March 2003 - FTSE 100 bottoms out at 3,287
• December 2004 - FTSE 100 stands at 4,731

I can console myself with the thought then when the market has plummeted I've been able to buy more index tracking units with my £25 - due to what is known as the pound-cost-averaging effect. And at least I didn't invest all my money in at once - by investing regular amounts I've done better than if I had piled it all in at the start.

The thing is, my brother and his wife have since presented me with a second niece so I've since been dithering over whether to share the fund between them when they're old enough; double my contributions so they each get in region of £10,000 or take advantage of the new Child Trust Fund for which Niece #2 qualifies.

I've decided on the latter course of action because of the tax breaks although I won't be able to start investing in the CTF until its official launch next April. The idea is that every baby born after August 31st 2002 will get a gift from the Government of £250, rising to £500 for low-income families who qualify for the full Child Tax Credit. The Government will add the same amount to the fund when the child reaches the age of seven.

In addition, family and friends will be allowed to top up the fund between them by up to £1,200 a year and it can be invested in shares, bonds or cash. No access to the funds will be permitted until the child reaches 18 so once the contributions have been made, they're locked in for the lifetime of the fund. Like the ISA, growth in the fund will be exempt from tax.

Obviously with the two financial contributions from the Government and the tax-free element, Niece #2 stands to gain more from her fund that Niece #1 so I'm going to have to think about that one to ensure fairness.

Don't forget that while giving money to children is great, it's important to teach your children the value of money, and to get them to start making their own investments as early as possible. The whole idea of the Child Trust Fund is to provide encouragement for children to save and, indeed, in later years teachers will be expected to educate children about such things using their own trust fund by way of example.

You may not have 70 or 80 years ahead of you to watch your savings build up those compound returns that are so vital to Foolish investors, but a child who's under ten can probably expect to have over 70 years of investing life ahead of them. So start teaching them early and, even better, start saving for them early. That way you can introduce them to the vagaries of a yo-yo-ing stock market because, if nothing else, it can get quite exciting at times!

Find out more about Investing For Children and check out the Child Trust Fund Boost For Your Baby.