As a father of two and godfather to five, all ranging between 2 and 17, I have always been keen to use a suitable investment product to save for each of their futures. Between them I have holdings in Child Trust Funds (CTF), shares in a UK Life Company, Premium Bonds, Unit Trusts and good old bank savings accounts.

But where is best?
It could be argued that as a general range of products the above investments form a reasonable portfolio. The degrees of risk vary from zero for cash and premium bonds (although each is susceptible to inflation risk) to medium for the direct holding in shares, CTFs and Unit Trusts. The problem is that each investment is particular to an individual child. 

A client’s attitude towards risk forms the essence of any investment decision and a well balanced portfolio is at the heart of investment planning. Future potential returns are directly correlated to the level of risk taken. The problem for me is that each asset is assigned to a particular child and hence each of them is potentially exposed to a different level of risk. For example my goddaughter is approaching 18 years of age and it’s my intention to gift her the shares in the UK Life Company with the hope that she will use the funds to help towards her higher education costs. At this moment in time, and due to good dividend income and a recovery in the share price following the credit crunch, she should hopefully be pleasantly surprised by their value. But what would happen if between now and her 18^th birthday another stock market dip was to occur? 

Something else to consider, which is always carefully monitored by all at Proposito Financial Planning, is the effect of initial and ongoing charges. The charges applicable to each of the above products varies from 0% to, in some cases, 5% initial and 1.5% annual management charges (AMC). The effect of charges can alter the value of any investment by some considerable degree if they are not kept as low as possible. 

Research published by Vanguard in October 2010 showed the effect that charges can have on the percentage of a portfolio retained after costs. A portfolio with an AMC of 1.5% pa will have retained 92.72% of it’s value after 5 years. After 15 years the percentage of the portfolio retained after charges has dropped to 79.72% – that’s over 20% removed by charges.  Even a modest reduction in annual charges can have a big impact as the saving is compounded each year.

By reducing the AMC to 1.00% pa the percentage of the portfolio retained after 5 years increases to 95.10% and 86.01% over 15 years.  This reduction in AMC by 0.5% pa has increased the percentage of portfolio retained over 15 years by over 7%.

In light of this it is, therefore, my intention over the next couple of week’s to review all the current holdings and their associated charges and provide a comment on each with a view to informing a decision on where it would be best to save for any child’s future, be it your own son or daughter, grandchildren, nephews and nieces or godchildren.