GUIDE TO INVESTING IN A CHILD TRUST FUND

CASH, BONDS, SHARES OR A COMBINATION - WHICH IS BEST FOR MY CHILD’S CTF?

There is no single right answer to this question, as this depends on a number of factors that are personal to you and your child, but the answer for most people is likely to lie with having a mix of all three. To make the right decision, it will help if you understand how the different *risks* and rewards of each of these types of investments can compare to each other.

The following chart shows the risks and *returns* of each of these types of investments. As a basic rule, it is worth knowing that, generally speaking, the lower the risk, the lower the return.

Expected Risk and Potential Reward

Past performance is not a guide to the future.

Investing in *shares* is potentially a good idea if you have enough time, usually at least ten years.  The reason for this is that in some years the shares may perform badly, but if held for a long time, this can be made up for by good returns in other years. The risks are further reduced if you hold a number of different shares instead of just one or two. Over the longer term, the overall value of shares has generally tended to rise more than it has fallen. So while savings accounts are more secure, if held for 18 years, shares are likely to make you more money. This has been the case for every 18 year period in the last 40 years.

(Source: www.childtrustfund.gov.uk)

*Bonds* are usually seen as the medium risk investment option. They are less risky than shares, and accordingly, are less likely to provide higher returns. However, they are still likely to provide more money for your child than a savings account, although they do involve more risk. Bonds can be mixed with shares – in ‘*balanced funds*’ - by *fund managers* with the aim of reducing risk and maximising returns.

(See Lifestyle example here).

The graph below illustrates how the three different types of investment have performed over the last 18 years.

Performance of £250 in UK All Companies, Gilts and Building Society

Please note that IMA’s factsheet is for information purposes only. It does not constitute advice.  It simply aims to help you better understand the risks and rewards of *Investment Funds* and why they can help reduce the risk of loss through “*diversification*” (the spreading of your money across a range of investments). Money deposited in a bank or building society is relatively secure, whereas an investment involves stock market risk. This means that the value of your investment can go down as well as up.  If you require any advice on investments, you should contact a *financial adviser*. Past performance is not a guide to the future.