Piggy banks have long been depicted as a great way to encourage children to save for their future. As an adult looking to build a nest egg for a child’s future, making a regular investment via a Junior ISA could be a great place to start. In this article, we explore the power of compound growth, the reasons why looking beyond cash can help to retain the value of your pot (against inflation) and the benefits of investing through investment trusts within a Junior ISA.
From piggy banks to portfolios
One of the most hackneyed investment cliches – that it’s time in the market, not timing the market, that grows your money – is also one of the most widely applicable. For successful investing, the longer your timescale, the better.
Most obviously, by starting the investment journey relatively early in life, you have additional years in which to make contributions and boost the capital at work for you. But crucially, the wonderful effect of compounding – whereby reinvested profits themselves create more profits, and so on – means that the longer your gains are being reinvested, the greater the growth (everything else being equal).
Saving for children is a logical extension to that idea, with added advantages. In the broadest terms, a nest egg built up during that first couple of decades of life provides a child with the capital to meet key expenses in the early years of adulthood and beyond – for example; driving lessons and a first car, university costs, the basis of a deposit towards a property.
Moreover, by engaging the child with the mechanics of their gradually increasing pot (as opposed to the things they’ll be able to buy with it in the years to come), you could help to foster in them a long-term interest and greater confidence in making their money work harder through investment.
Holding in cash vs. investing in the stock market
Of course, it’s perfectly possible to make a useful contribution this way by opening a high-interest savings account in a child’s name and accruing interest on the cash. It’s easy and safe, and the top-paying accounts may pay more than inflation at times. Over the decades, though, the value of your money is likely to be growing only marginally in real terms.
The fact is that if you’re putting cash away for a child, you probably have a timescale of at least a decade, perhaps two – and it therefore makes financial sense to invest the money in the stock market. Although the market, and by extension the value of your investment, will inevitably rise and fall, over that kind of timeframe it has plenty of time to recover and look to outperform cash.
That’s brought home by figures from the latest Barclays Equity Gilt Study, which each year compares the long-term performance of stocks, gilts (government bonds) and cash.
The 2024 study shows that UK equities (despite missing out on much of the tech strength driving the US market over recent years) produced real annual returns (above inflation) averaging 1.2% over the 10 years to the end of 2023; in comparison, gilts returned -2.4% and cash -3.1% in real terms.1
Over 20 years, it’s a stronger story for UK equities, with annualised real returns of 3.1%; gilts broke even, while cash investments were still down in real terms by an average -1.8% a year.
What investment approach should I consider?
Barclays’ research focuses on the broad stock market, and it’s certainly possible to simply track the market’s fortunes up and down by investing in an index tracker or exchange traded fund (ETF).
However, actively managed investment trusts aim to beat market returns over the long term. They do that by harnessing the skills and expertise of professional portfolio managers to identify and invest in a basket of companies with particularly strong prospects.
Although past performance does not guarantee future results, Figures from the Association of Investment Companies/Morningstar show how successful trusts have been. A £1,000 lump sum invested for 18 years in the average investment trust increased in value to over £4,400 by the end of December 2024 – a return of more than 340%.2
In contrast, the FTSE All-Share index produced a total return of around 165%,3 while the average UK savings account with a £25,000 deposit returned 17%.4
Unsurprisingly, whilst taken on the risks, investment trusts have long been a popular choice for anyone looking to start investing for a child, whether it’s a one-off lump sum at birth or for Christmas, or regular contributions from income that will build up through the years.
J.P.Morgan’s investment trusts
JPMorgan has a range of highly rated broad-based investment trusts with a long-term growth focus that could make an ideal choice for a child’s investment; examples include The Mercantile Investment Trust, JPM Global Growth & Income and JPM American trust.
Importantly, the vast majority of investment trusts can be held in a Junior ISA, enabling them to grow completely free of income tax or capital gains tax over the decades. For the 2024/ 2025 tax year, up to £9,000 from family and friends can be contributed to a Junior ISA.
There’s no doubt that your commitment to invest on a child’s behalf can make a tremendous difference to their life choices in the long run – and the earlier in their lives you start, the better.