The lead up to Christmas is a good time to start an investment plan for a child or grandchild.
It can be done using managed funds for as little as $2000 as a once-off investment or $1000 if a regular savings plan is attached. Savings plans start from $100 per month.
Investment plans can be set up to accumulate money to pay for future school or university fees. Alternatively, the aim could be to give the youngster a good start in life by saving a lump sum for a home deposit or other worthwhile purposes.
Many grandparents open savings accounts for grandchildren but they earn little if the money stays in the bank. The current rate isn't much more than one per cent per annum. These plans usually have very long timeframes.
Over the long-term, a higher-earning rate makes a huge difference. Managed funds are likely to earn six to ten per cent per annum long-term average, depending on where they invest. The term until the money will be needed is important. If it is only a few years the investment funds need to be diversified, to manage volatility.
Diversified funds usually earn six to seven per cent per annum long-term average. If the term is ten years or more the investments can be in funds focused on good quality shares and properties. Examples include Fidelity Australian Equities, MFS Global Equity and AMP Core Property Fund.
Over the ten years to the end of October, these earned 9.37 per cent, 13.93 per cent and 10.71 per cent per annum respectively according to research firm Lonsec.
Compound interest is a powerful force over the long-term so returns like that build up to some remarkable values. For example, at ten per cent per annum a single investment of $5,000 becomes nearly $13,000 over ten years and more than $20,000 over fifteen years.
If a savings plan of $100 per month is added the value is $34,000 after ten years and over $63,000 after fifteen years.
Experienced financial planners have seen real cases where investment plans for small children have enabled parents to pay for private school fees during high school years. In other cases, investments for young children have grown to more than $50,000 by age 21, a great start for a young adult.
Future returns are not known but the long-term earnings from shares, property and businesses must be higher than from bank deposits. That's part of how the capitalist system works.
It is also possible to buy direct shares in major blue-chip companies for children. The parent or grandparent will have to invest as a trustee for the child and will usually need to quote their own tax file number to the investment fund.