Tips for wealthy tots: Advisers suggest good ways to invest a child's savings

VICTORIA BARNES, born on 16 May 1993, is already a woman of property. Her parents, Philip and Kate, are looking for investment homes for Victoria's pounds 5,000 capital and pounds 25-a-month savings.

We looked at the range of what is available and asked two advisers for their views.

The ideas they have considered so far include the National Savings Children's Bonus Bond, Tessas and the children's savings plans offered by friendly societies.

The National Savings Bond is a must for Victoria. With a guaranteed rate of 7.85 per cent tax free over five years, it offers top returns.

You must leave it untouched for the full period in order to earn the full interest and there is a pounds 1,000 maximum.

Tessas, like PEPs, cannot be held by anyone under 18. If you wanted to use one to invest for a child you could always hold it in your own name and leave the proceeds to the child in your will. Rates are good - around 8 per cent - but they may go down. Children who are non-taxpayers can register to have interest from building societies paid gross anyway, but rates may be lower than Tessas for smallish sums.

Friendly society plans have a very small monthly investment limit and tax-free returns. With most you can put in either pounds 9 or pounds 18. They run for a minimum of 10 years and you will get a poor return if you cash in early. The really big drawback is charges. With perhaps as much as one whole year's premiums being clawed back, some advisers feel that charges might outweigh the tax benefits of the plan.

Since interest rates are at a long-term low, most deposit investments look unattractive. Gilts are mostly trading above par at present, which means taking a capital loss on maturity. Taking the loss into account, longer-term gilt yields are around 6.5-7 per cent.

Poor interest-rate returns and the expectation of recovery in the stock market mean that share investments, including unit trusts and investment trusts, should be used for a large part of Victoria's assets. They have the advantage of no minimum investment term.

The big question is what to choose. For the monthly savings plan, a unit trust or investment trust scheme seems the obvious choice. There are now fewer unit trust savings schemes with a pounds 25 minimum, but choices with a good record include Perpetual, National & Provincial and Schroder.

Many investment trust schemes, including Foreign & Colonial and Henderson Touche Remnant, still accept a pounds 25 minimum. With the recent rising markets, many investment trusts have gone to a premium: the share price of the fund is worth more than the fund's assets, so you are paying more for the investments than they are currently worth. You should check on this before buying. With a regular savings plan, times when the trust is at a premium should be balanced out by when it is at a discount.

The two advisers we spoke to came up with some colourful ideas for the lump sum. At the more conservative end, Robin Boyle at stockbrokers Dunbar Boyle and Kingsley suggested a 50/50 split between an index-linked debenture and an investment trust. The debenture is Severn River Crossing 6 per cent Index- Linked 2012. Its income derives from the company's right to levy index-linked tolls on the Severn bridges and, assuming inflation at a modest 5 per cent, over the next 19 years it will offer a 4.6 per cent return above the rate of inflation.

Robin Boyle's other choice was Dunedin Income Growth investment trust, which he likes, given that the market is 'not particularly cheap' at present, because it has 70 per cent in UK equities and 30 per cent in fixed interest. Dunedin has a no-cost purchase scheme and the index-linked stock can be bought from DBK at a cost of pounds 30 for pounds 1,000 of stock assuming no advice is given.

More speculatively, Kean Seager at the Bristol firm Whitechurch Securities, suggests some specialist choices. The risk involved will be relatively reduced over the long term of the investment. After putting pounds 1,000 into the National Savings Bond he would put pounds 3,000 into two unit trusts - pounds 2,000 into the GT Smaller Companies' Dividend Fund and pounds 1,000 into Martin Currie Emerging Markets.

His final stroke would be pounds 1,000 into the capital shares of a split-capital trust such as River & Mercantile. Capital shares give an exaggerated reflection of market movements. With an average 10 per cent growth in the All-Share Index, River & Mercantile capital shares will achieve a 26 per cent growth rate. This would turn pounds 1,000 into over pounds 100,000 in 21 years' time. In extreme conditions, such as no market growth for several years, the shares could lose all their value. But chances of this are low.

Parents should remember that money they give to their children will be taxed as parental income while a non-parent's gifts will not. Substantial amounts from grandparents should be kept separate - either granny should make the investment herself on behalf of the child, or she should write to the parents to provide evidence of the gift.

Contacts: Dunbar Boyle & Kingsley. Tel 071-247 8898. Kean Seager's booklet 'Split Investment Trusts' is available to Independent readers for pounds 1, including p&p, from Whitechurch Securities, 36 Westbury Lane, Bristol BS9 2PP. Tel 0272 687277.