Saving for your children early can set them up for a bright future – but merely putting money aside is unlikely to be enough on its own.
Junior Isas (Jisas) were launched in 2011 to allow parents a tax-free way to save for their children. Once invested, the money cannot be withdrawn by anyone other than the child on or after their 18th birthday.
However, for those with dreams of handing over enough for a house deposit, a serious amount of risk will need to be taken.
House prices have increased by 140pc over the past 18 years according to the UK House Price Index, from around £98,000 in January 2002 to £235,000 in December 2019.
At this pace of growth a parent would need to hand over £84,507 in 18 years’ time to meet the average deposit of 15pc.
For the 2019-20 tax year you can save up to £4,368 annually. With some sensible investing, saving the maximum amount could get to the target. Only very lucky children will have parents in a position to do this consistently for 18 years, however.
Many more families will be in a position to save £100 a month, £1,200 a year.
Assuming there was no investment growth or interest, the Jisa would be worth £21,600 when it matures, a quarter of the amount needed for a house deposit.
To meet the target, some high-risk investment choices need to be made, asssuming house prices continue their meteoric rise. Thankfully, with the guarantee of such a long timeframe, this is one of the rare times that taking a lot of risk is recommended by financial advisers.
Tom Rosser, of fund supermarket The Share Centre, calculated that, with compounding, investors would need to make an annual return of 12.6pc.
Over the past 18 years, no major markets would have achieved this, although the FTSE 250 index of British medium-sized companies and MSCI Emerging Markets index of developing countries would have got closest, returning 10.6pc and 10.4pc respectively.
“Investments in emerging markets can grow fast but this comes with a lot of political and economic risk. As a result, I would probably look to the domestic British stocks of the FTSE 250,” he said.
Currently this area of the market is at historically low valuations compared with the rest of the world, mainly due to continued uncertainty over the effects of Brexit. Mr Rosser suggested investing via a quoted “tracker” fund, the £3bn Vanguard FTSE 250 Ucits ETF.
Launched in 2014 it does not have the long-term track record of some of its rivals, but Mr Rosser said Vanguard “has a proven ability to track benchmarks at low costs”. It is the cheapest option on the market, costing 0.1pc per year.
Darius McDermott of ratings agency FundCalibre said investors should think even smaller. The £1.3bn Marlborough UK Micro-Cap Growth fund invests in the smallest British companies that have the potential to grow even faster. The management of the fund is outsourced to Hargreave Hale, regarded as one of the best stock pickers in the field.
Under the management of Giles Hargreave and Guy Feld, it has a proven track record since its launch in 2004, providing investors with a more than eightfold return.
The fund typically holds around 250 companies in a bid to spread the risk of one holding failing and tentatively invests to begin with, cutting losers quickly. The fund costs 0.78pc per year.
For those wanting to invest their money for good, Rob Morgan of fund shop Charles Stanley suggested the £269m Baillie Gifford Positive Change fund. The fund has returned 118pc, beating global stocks, which have made 37pc over the same time.
The fund backs companies addressing critical challenges in areas such as social inclusion, education, quality of life and the environment.
He said: “The managers are patient investors with a strong penchant for identifying future winners.” The fund costs 0.55pc a year.
In a similar vein, Sam Buckingham, at wealth manager Canaccord Genuity suggested a thematic fund focusing on emerging global trends.
Mr Buckingham picked out the £12m Fidelity Water & Waste Fund, managed by Bertrand Lecourt. Although small, there is a £1bn European version of the fund available to institutional investors.
“Not only will the companies it invests in benefit from population growth and urbanisation, but there are many more areas for growth that should last over the next 18 years,” he said.
The United Nations Sustainable Development Goals blueprint is aimed at tackling the largest problems the world faces over the next decade. It provides an indication of where a substantial amount of investment is required and has indentified water as a key area.
The fund is newly launched and charges 0.9pc. It is only available via Fidelity’s fund shop. Similar funds from Pictet and Legal & General are offered far more widely.