Putting £300 a month into a Junior ISA while aiming to achieve a 10% annual return could be one of the best decisions we make as forward-thinking parents.
While the allowance is for £9,000 per year, just £300 a month would give the portfolio fuel to reach over £5m. But it takes time. Fifty years to be precise. And this is why starting early is so important.
Getting started
Opening a Junior ISA is easy. It can be done from any age. And this is why I opened an ISA for my daughter when she was born. This can be done through most major brokerages — often without any of the trading fees associated with an adult account.
From here, a parent can add a lump sum or set up a direct debit. The money can then be allocated towards funds, investment trusts or stocks.
Thanks to the UK’s generous Junior Stocks and Shares ISA allowance, all gains are tax-free, letting the returns compound without anything taken off the top.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Compounding to glory
Compounding is a simple idea. It means we earn returns on our contributions and our returns.
Early on, growth is slow. After 10 years, the regular £300 deposits add up to £36,000, but compounding makes it £61,453.
In year 13, the total interest accrued overtakes the running total of monthly deposits. This is a tipping point where growth really accelerates. Fast-forward to the 50-year mark and the steady discipline is rewarded: £180,000 of cumulative deposits have mushroomed into just over £5.2m, with more than £5m of that windfall made up of compounded investment returns.
This happens because every year, the 10% growth applies to a bigger balance. By year 40, it’s not just on a five-digit sum, but on over £1.7m.
Of course, there’s no guarantee we’ll make 10% a year. Many investors don’t. But even a more lukewarm 5% return would generate over £800k long term. Interrupting the compounding process by withdrawing money is also an issue.
Where to invest?
Like all investments, capital is at risk in a Junior ISA. However, by investing smartly, investors can hopefully avoid unnecessary losses. One option would be to invest in a global tracking fund — this makes things quite easy.
But I chose to invest my daughter’s ISA into two stocks each month. Over time, it’s become quite diversified. One recent stock I’ve added to her ISA is Melrose Industries (LSE:MRO).
For me, it’s a high-quality engineering business with substantial growth potential. While its share price has lagged behind Rolls-Royce, Melrose has the hallmarks of a stock about to surge.
The company controls stakes in 17 major Risk and Revenue Sharing Partnerships (RRSPs), which deliver recurring, royalty-like income streams from around 70% of global wide body and narrow body aircraft programmes. These long-term, high-margin contracts underpin stable and expanding cash flows.
Melrose’s ongoing restructuring has produced tangible results. Its underlying margins have more than doubled, and earnings have more than tripled since 2023. In 2024, Melrose achieved a 23.7% gross profit margin. That’s stronger than Rolls-Royce’s 22.4%.
Despite these strengths, its forward price-to-earnings (P/E) remains just 14.9 times, with a price-to-earnings-to-growth (PEG) ratio of 0.75 based on projected 20%+ annual EPS growth through 2029.
Supply chain issues are a concern, but it remains a favourite of mine. Definitely worth consideration.
