The merits of the new Junior Individual Savings Account (ISA) are clear according to Fidelity Worldwide Investments but where to invest the allowance needs consideration. With the current low interest-rate environment many savers who would have not contemplated investing in funds may now decide to do so in order to avoid the inflationary risk which comes with cash investments.
Government-backed savings scheme
Junior ISAs are a new government-backed savings scheme for children under the age of 18. You can invest up to £3,600 in the current tax year in a cash or stocks and shares Junior ISA, or a combination of both. Multi Asset or Multi Manager funds may be a sensible option for your Junior ISA investment, especially during these volatile times. You would not have to keep changing your asset allocation to gain from market fluctuations; you could leave that to the fund manager to monitor and make use of their expertise.
Managed solutions such as Multi Asset or Multi Manager funds may also make sense for those who want to put money aside for their children but don’t want to have to worry about where to invest the money. These funds are designed for smooth returns without the individual investor worrying where to make changes in allocation.
Time investment horizon
When considering investments for the Junior ISA, parents should consider the time horizon for their investment. The longer the time horizon, the more beneficial it will be to own higher – return but riskier assets. We are currently in a two speed world, with the Asian economies faring much better than those in the West.
Investors may wish to consider exposure to this growth differential either via regional funds or via the UK where many FTSE listed companies have a strong exposure to emerging markets. The longer time horizons enjoyed by many Junior ISA investors are likely to be appropriate for riskier investments because they can benefit from the ability to ride the ups and downs of more volatile investments.
High yield equity income fund focus
Longer-term investors can also focus on high yield equity income funds. The reason for this is that dividend income has always provided the lion’s share of total returns from equities, thanks to the benefit of compounding and the relative reliability of dividend income compared with capital growth. In a low-growth environment, this is likely to be even more the case.
For those with a shorter time frame, they could consider life-style investing where a portfolio is automatically wound down from a high equity content in the early years to a higher bond and cash weighting as the target date approaches.
The value of investments can fall as well as rise, so your children may get back less than you invest. Tax savings and eligibility to invest in a Junior ISA will depend on personal circumstances. All tax rules may change in future.
