There are many reasons to give your children an investing headstart. It may be to:
- Introduce them to financial literacy young
- Give them a good investment ethic
- Ensure they have a deposit for a house
- Allow them concentrate on university studies without money worries
How much do they need?
With the national median house price hitting $335,000 in March, homes are out of the reach of many young people. Not so if they've been investing regularly in a fund for 10 or 15 years, or from birth.
Cautious parents may balk at the idea of surrendering their child's future money to a fund manager. Conversely however the highly regarded Motley Fool website argues that it's more dangerous to leave your long-term savings in a low interest deposit account for the long term where inflation will erode it. A well managed, low charging fund should keep pace with inflation.
When investing for children, it's a good idea to find a fund that allows small and regular investments. The drip by drip approach of putting a small amount in regularly is an approach that's called dollar cost averaging and reduces risk because you never make a single large investment at the wrong time.
As time goes on it can make sense to tell children that they have a managed fund and talk to them about how it will grow like Jack's magic bean stalk if it's fed and nurtured with regular small sums of money.
A simple example would be the AMP Capital Investors New Zealand Property Fund, which has been growing at 7.01% each year for the past 10 years. A regular $250 a month investment into that fund would grow to more than $42,784 over 10 years. Over 20, if you'd started the month your child was born, it would grow to $127,028. It should be said, however, that calculators such as the one on the Sorted website, where these calculations were done, don't take into account fees and tax rates.
The good news on tax, however is that brand new rules that come into effect in October mean that children's funds will only be taxed at their marginal tax rate, which is almost always 19.5%, compared to 33% making their money grow faster.
It may be worth choosing a fund that invests in something children can identify with. Perhaps a fund that owns shopping centres that the child visits, or if they have a penchant for junk food, a holding in Restaurant Brands New Zealand, owner of KFC and Pizza Hut, might make sense.
It's also worth considering a fund or funds where fees are not high.
Parents do need to decide who is going to have ownership of the fund. Some teens may have the urge to withdraw the lot and take a drug-fuelled round-the-world tour.
www.fool.co.uk
Diana Clement
Independent Financial Commentator
Issue 9: 26-04-2007, 4-5-2007