Why cash is not king when saving for children

Parents would be furious if they found out their children had been throwing away a chunk of their pocket money each week. So, what will kids say when they discover what mum and dad have been up to? New research from Janus Henderson Investment Trusts suggests that almost half of parents (48%) opt for cash savings when investing on behalf of children.
 

That simply makes no sense. For years, the returns on cash savings have languished, with even the best accounts doling out no more than a few basis points of interest. Now the ultra-loose period of monetary policy seems to be over and interest rates are rising; but while you can get 4% plus on the best accounts these days, that’s not much use when inflation is in double digits. Parents investing this way on behalf of their children are throwing good money after bad.
 

The really frustrating thing about Janus Henderson’s survey results is that there is no good reason for parents to be so conservative. The old advice about stock markets outperforming over the longer term remains as true as ever. Yes, markets have been volatile in recent years, but all historical evidence suggests that a buy-and-hold strategy – sticking with equities for five to ten years or more – will deliver better returns than you can expect from any other asset class. All the more so if you’re talking about real returns rather than nominal ones.
 

The subtext, of course, to Janus Henderson’s research is that the company hopes parents might be tempted to save for children through one of the investment companies that the asset manager looks after. Clearly, it is far from a disinterested party in this regard.
 

Nevertheless, there are good reasons that the investment companies sector has a long association with children’s savings. Indeed, in times gone by, many funds offered children’s savings schemes themselves. For the most part, these are now run by investment platforms rather than by investment companies, but the attractions remain the same.
 

Most of all, there is the question of performance. If you’re investing over a long-term period for children – to build a nest egg they can use in adulthood, say – you want a no-hassle approach. That means some sort of collective investment vehicle with professional management where you can feel comfortable parking the money for an extended period. And we know that in the past at least, the best performing such vehicles have tended to be investment companies – over the past decade, for example, they have outperformed open-ended funds in 11 out of 16 sectors.
 

Other investment company features that make them particularly attractive to those saving for children include the low entry point. Monthly savings schemes allow you to invest as little as £50 a month in an investment company – and even relatively small contributions can grow into large sums over time.

There is also the industry’s reputation for reasonable charges to consider – you don’t want asset managers’ fees eroding the value of your children’s piggy banks. Plus, there is the potential for tax efficiency – investment companies can be held inside tax-free shelters such as junior individual savings accounts (ISAs), meaning there is no tax ever to pay on income or gains, and no need to worry about filing details of the investment on tax returns.
 

All in all, investment trusts have long represented an excellent entry point for parents (and grandparents and extended family) saving for children. Still, whatever the vehicle, the broader point remains – parents who are investing for the long term on behalf of their children, should not be undermining their good intentions by sticking money into a cash savings account.