There are three investment options for Child Trust Funds; stake holder accounts, savings accounts and investment in shares. This article looks at these three options.
STAKE HOLDER ACCOUNT
A stake holder account works by investing the £250 in shares in a number of companies. The voucher is invested in many different companies to reduce the risk. The risk is reduced as a bad performance by one company is not so catastrophic because it can be made up by others performing well. Once the child is 13 the child trust fund provider starts to move the money into lower risk investments. Decisions as to where it is moved and the speed at which it is moved is made by the provider. This decision will be based on how well the shares have been performing and their forecast as to how they will continue to perform. The negative of the move to the lower risk investments is that they will no longer benefit if the companies previously invested in performs well. The providers charge is limited by the government to no more than 1.5% each year. This is not the case with normal investments, but is one of the rules bought in by the government for Child Trust Funds.
A stakeholder account is how the child trust fund is invested if it hasn’t been invested by the child’s parents by its one year expiry date.
With a savings account the child trust fund is much more secure than the other options available. It is simply put into an account and kept there until the child turns 18. It is not reliant on the success or failure of shares, and therefore the value cannot go down, only up. The amount that they increase depends on the interest accumulated. The negative of the savings account is that the interest gained is likely to be minimal. Once inflation is taken into account it will be even less and in real terms and may actually be worth less than when it started. Inflation could rise more than the interest. It is almost certain that £250 will not buy as much in 18 years time than it does now. Therefore there is little chance of any significant increase in the value of a child trust fund through a savings account, but it is safe from going down in value.
INVESTING IN SHARES
Investing the Child Trust Fund in shares gives it the best chance of a significant increase in value. Like the Stakeholder’s Account, this scheme sees the fund being invested in companies. Over an 18 year period the amount originally invested could increase significantly. It depends on the performance of the companies in question but over this period it is almost certain that the fund will increase. Poor performance in one year can be made up by good performance in others. Stock market values tend to rise over a period of several years. But there is no guarantee. Although it is not likely, it is possible that the fund could decrease in value, and in theory could be completely wiped out. The providers charge is a percentage of the value on the child trust fund. Unlike the stakeholders account though, it is not limited to 1.5 per cent.