Bag a real bargain this Christmas

Did you bag a bargain on Black Friday or Cyber Monday? If not, don’t despair – those glitzy deals almost certainly weren’t all that they were cracked up to be. And now you have some money left over to find something of genuine value in the run-up to Christmas.

And if you’re thinking about presents for children – your own, or grandchildren, say – maybe it’s worth thinking about doing something a little different this year. A financial gift, namely shares in an investment company, could be one present they’ll be thanking you for over many years to come.
 

Presents on the cheap

The good news, to come back to the search for bargains, is that the investment companies sector is a great place to look right now. For one thing, many funds have been reducing their charges in recent years – and that’s a trend that has continued in 2022, with close to 30 investment companies cutting fees. But also, investment company shares currently trade at unusually attractive prices.

This is because the way in which an investment company is structured, with a fixed pool of investments that you buy or sell exposure to by buying or selling shares on the stock market, can sometimes give rise to anomalies. When demand for a fund’s shares does not keep pace with supply, the price of those shares will fall, irrespective of what’s happening to the value of the fund’s investments. The shares then trade at a discount to the value of the underlying assets.

Right now, investment company discounts are running at an average of around 12%, having started the year at less than a third of that level. Investors in world stock markets have had a difficult year, so sentiment has been depressed. That’s affected investment trust company shares like the rest of the market – hence the discounted prices. You’re buying assets for 12% less than they’re actually worth.
 

A gift that keeps on giving

With inflation in double digits, there won’t be many presents that cost less this Christmas than a year ago – but investment companies could be one. So, why would you think about putting them in the kids’ stockings?

The short answer is that even a small holding in an investment company that puts its money into stock markets can grow into something much larger over time, courtesy of investment returns and the laws of compound interest. An investment of £1,000 in the average investment company 18 years ago – for a new-born, say – would now be worth £6,089 according to the AIC’s data. Alternatively, you could sign up to a monthly savings plan; if you’d done that 18 years ago and put in £50 a month, you’d have invested a total of £10,800 to produce a fund worth £28,810 today.

Are investment companies risky? Well, it’s true that share prices can fall as well as rise, but over the long term, stock markets have in the past always outperformed other types of investment. And if you’re buying something for young children with the intention of them cashing it in as they reach adulthood – for further education costs, perhaps, or a deposit on a first home – it’s the long term you need to focus on.
 

Tax-free returns

There’s more good news too. Children are entitled to their own tax allowances, just like grown-ups, so they won’t pay income or capital gains tax on the money your gifts make for them until they’ve exceeded those thresholds.

However, to be sure of keeping your generosity out of reach of the taxman, you have the option of investing inside a Junior ISA. These are individual savings accounts aimed specifically at children – under the age of 18 – with an annual allowance of £9,000. The accounts must be set up by the child’s parents or legal guardian, but anyone can put money into them.

Importantly, just like with the adult version, all income and profits on any investment held inside a Junior ISA is tax-free. Happily, investment company shares are eligible for inclusion in these shelters, ensuring the lucky recipients will never pay a penny of tax on your financial gift.