Unleashing the piggy bank’s potential

5 min read 23 Feb 22

Why going for growth through investments could give your child a head-start in life.

Like any noble ambition, attempts to build up a nest egg for a child’s adulthood can be undermined by circumstances and choices. Saving money in cash rather than stocks and shares may seem the safer option – after all up to £85,000 is safe in a bank or building society as it’s covered by the Financial Services Compensation Scheme. But over time, rising prices can erode what it’s worth, particularly when interest rates remain so far below the rate of inflation.

To give a child’s savings greater opportunity for growth, you might consider whether investments could play a role in realising your ambitions – and ultimately theirs.

Learning to embrace risk

If you are thinking about putting your child's savings to work through investments, there is a simple rule of thumb that could make all the difference over the long term. That is, the younger the child, the greater their tolerance for investment risk can be.

While it might feel counter intuitive to put an infant’s first savings into higher risk investments, there is a compelling logic to suggest they might eventually thank you for it.

Since the capital is locked away until they turn 18, you can commit to investment approaches that target growth. Rather than worrying about day-to-day price movements and market movements you can focus on squarely pursuing long-term capital growth, maximising the potential value of their investments when they come to need them.

The value and income from any fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee that any fund will achieve its objective and you may get back less than you originally invested. 

…But keep a lid on it

That said, embracing risk in pursuit of higher returns does not mean throwing caution to the wind. The more investment risk you take, the more your investment has the potential to grow, but the greater the chance of failure – and of permanent losses.

But by investing across a variety of different assets (equities, bonds and cash for example) rather than relying on just a handful of investments to succeed, you can reduce that risk. In a well-diversified portfolio (a collection of investments) losses from individual, higher-risk assets like equities - shares in a company - could be offset by the performance of others considered to carry less risk, like bonds*. We have a range of helpful guides on our website that explain the pros and cons of each of the different asset classes to help you understand more about the role they could play in helping you achieve your investment objectives.

While you might build your own basket of assets on a child’s behalf, you could find it easier to achieve effective diversification by investing with a professional fund manager. Funds, which combine a range of assets into one single investment, will pursue a specific objective, such as delivering long-term growth, by selecting and managing a combination of assets.

Making the most of ISAs

It’s not just cash that you can save into a Junior ISA (Individual Savings Account), but investments too. Like an adult ISA, you can protect any capital gains that your investments might make for them from personal tax. Ultimately, this means your gift will have the maximum impact whenever they choose to access it and take their money out.

Under current tax rules, you can invest up to £9,000 a year through a Junior ISA, or JISA as they are often known. However, Junior ISA tax rules may change in the future and their tax advantages will depend on your individual circumstances.

Significantly, Junior ISAs can only be tapped when a child turns 18. With the money locked up, for 18 years if you are making the first investment for a baby’s future, you can afford to take a genuinely long-term approach to investing.

In doing so, you could create opportunities for investment returns that could be transformative in their adult years. You can find lots more information about Junior ISAs on our website, including an introduction to our Planet+ funds to offer some food for thought. These funds look to invest your money in a way that benefits communities, helps solve environmental issues and contributes to a cleaner, better world, all while targeting long-term returns for the future. So why not take a look at how your child’s savings could work towards a brighter future and build up into a nice sum too?

The views expressed in this article should not be taken as a recommendation, advice or forecast. If you are unsure about any investment decision you should speak with a financial adviser. If you don’t already have one you can find one on our website.

*Bonds: A loan in the form of a security, usually issued by a government or company. It normally pays a fixed rate of interest (also known as a coupon) over a given time period, at the end of which the initial amount borrowed is repaid.

By M&G Investments

The views expressed here should not be taken as a recommendation, advice or forecast.

The value and income from any fund's assets will go down as well as up. This will cause the value of your investment to fall as well as rise. There is no guarantee that any fund will achieve its objective and you may get back less than you originally invested. 

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