Sensible savings from Santa: An investment is a lasting gift, and lucrative if you find the best rate of interest. Maria Scott reports

BUILDING society passbooks and National Savings Certificates may not have the same appeal on Christmas morning as Sonic the Hedgehog or My Little Pony.

But the advantage of investments is that they make parents and grandparents feel good. Many children also receive cash at this time of year and will be looking for a place to save it.

Market research has shown that they are street-wise when it comes to weighing up free gifts against higher rates of interest.

Cambridge Building Society, which has one of the most generous rates of interest available for young savers - albeit reduced last Monday from 8 per cent gross to 7 per cent - deliberately offers no gimmicks or giveaways with its First Account for children.

'Research we conducted showed that children wanted an account with a high rate of interest,' a spokeswoman for the society said.

The minimum investment is pounds 1 and the maximum pounds 800. Under Inland Revenue rules interest earned by children on money given to them by their parents will be taxed as the parents' income when the annual interest comes to more than pounds 100 in one tax year. 'We set the ceiling at pounds 800 to ensure that interest would not exceed pounds 100,' the Cambridge spokeswoman said.

Most children are non-taxpayers, able to earn up to pounds 3,445 before paying any tax. Parents or grandparents opening accounts on behalf of children under 16 should arrange to complete form R85, available from banks and building societies, so tax is not deducted from the accounts.

Cambridge Building Society's children's account is available only through the society's 15 branches in and around Cambridge. Similarly, the Chorley & District Building Society's Young Chorleian account, paying a market-leading 8.35 per cent on pounds 5 upwards, is open only to residents of Cumbria, Lancashire, Merseyside and Greater Manchester.

However, some other smaller societies offering high rates on children's accounts will take deposits and arrange withdrawals by post from outside their local areas.

Among these is Monmouthshire Building Society, paying 6 per cent on deposits of pounds 10 upwards in its Young Savers account, and Dudley Building Society, paying from 3.38 to 4.58 per cent gross, depending on the amount invested in its Young Savers Club account.

Norwich & Peterborough Building Society's Head Start Bond - minimum pounds 250 - can also be operated by post. The rate is 7.25 per cent gross.

It is always worth checking, especially with the large building societies and banks, whether there are better rates available to children through adults' accounts than on accounts specially set up for children.

Halifax Building Society has two special accounts. Little Xtra Club for children up to 11 pays 4.5 per cent gross on pounds 10 or more. Children receive a variety of gifts. Quest Club, for 12- to 16-year- olds, pays the same interest.

Children who already have savings of at least pounds 500 can earn a higher rate of interest on the Halifax's Instant Xtra Plus account. It pays between 4.75 and 6.15 per cent gross depending on the amount invested.

Woolwich Building Society pays just 1 per cent gross on its Woolwich for Kids account. Children may prefer to forgo the money box, wallet and other gimmicks for an investment in the society's Prime Gold account paying 1.85 per cent on deposits up to pounds 500, with rates rising to 7.05 per cent on larger amounts. The minimum opening balance for children is pounds 1.

National Savings has a number of products suitable for children, including the one month's notice Investment Account, which pays 6.25 per cent gross without the need to complete a form. But from February the minimum deposit goes up from pounds 5 to pounds 20.

The Children's Bonus Bond, with a five-year life, is designed for adults to purchase on behalf of children. The new issue of the bond went on sale on 7 December paying a guaranteed 7.85 per cent, tax-free if held for five years. The minimum investment is pounds 25 and the maximum pounds 1,000.

Parents could also buy savings certificates for children but the index-linked issue and the fixed-interest certificates have minimum investment levels of pounds 100.

Premium Bonds can still be bought for children under 16 for a minimum investment of pounds 10, but from 1 February this minimum will rise to pounds 100.

With returns diminishing on all forms of deposit-based investments some parents and grandparents may think it worthwhile considering the stock market. Investments in equity-linked schemes are not suitable if you want children to have instant access to their money, as they must usually be held for some years to see a reasonable return.

Invesco MIM's Rupert unit trust, designed for children, is a UK equity growth trust which, according to figures from the investment performance-tracking company Micropal, has made a profit of 17.27 per cent for its investors since December 1989. It ranks 37th out of 139 UK growth funds over the same period.

Lump sum investments of pounds 800 into the trust bring a free Rupert puppet. The minimum monthly contribution is pounds 10.

Friendly societies offer a range of life insurance-linked 'baby bonds' for children. They accept a maximum of pounds 200 a year or pounds 18 a month. The proceeds are tax-free. But baby bonds are designed as 10-year savings commitments and if the plan is cashed in before this investors receive either their premiums or the value of the plan, whichever is the lower.

Some societies, such as Family Assurance and Homeowners', specialise in unit-linked plans. Tunbridge Wells Equitable has a good performance record for its with-profits plans. A survey by Money Management magazine at the beginning of this year stated that a 15-year-bond, taken out in August 1976 for a three-year-old child, with a total investment of pounds 226.40 ( pounds 1.48 a month) would have produced pounds 1,042.51 on maturity. This represented growth of 16.4 per cent a year.

(Photograph omitted)