THE government is shortly expected to announce details of its child trust fund. Under the new system, which will not be launched until April 2005, all children born since September 1, 2002 will receive a £250 voucher, which parents can invest for their child’s future, writes Clare Francis.

Families that receive the full child tax credit will get £500 for each child.

A number of firms, such as Children’s Mutual, Homeowners Friendly Society, Invesco Perpetual, Edinburgh Fund Managers, Witan and Isis Asset Management already offer savings schemes targeted at children.

Savings plans offered by friendly societies, such as the Children’s Mutual Baby Bond, are heavily promoted to mothers in baby magazines and hospitals. They are tax-free and have low minimum investments: you can pay in as little as £10 a month or £100 a year up to a maximum of £25 a month or £270 a year.

Friendly-society bonds typically invest in with-profits funds that pay annual bonuses designed to smooth returns. However, many with-profits companies have slashed bonus rates in the past few years so most advisers have stopped recommending them. The bonds are also inflexible because you have to hold them for 10 years.

If you want to invest in equities, advisers prefer unit and investment trusts. However, you are not restricted to schemes specifically designed for children. Michael Owen of Plan Invest, an adviser, says: “Don’t be blinded by marketing gimmicks — you should pay more attention to the underlying investment.” Always check charges, performance, the manager’s track record and the risk profile of the fund.

Invesco Perpetual’s Rupert Bear fund, for example, is down 10.35% over the past five years compared with a gain of 1.04% for the average fund in the sector, according to Standard & Poor’s, a data company.

Equities are ideal for children because you are normally investing over the long term, so are able to ride out the peaks and troughs of the market.

Figures from Foreign & Colonial show that if you had invested £1,000 in the average building-society account 18 years ago, it would now be worth £2,825. If you had invested the same amount in the Foreign & Colonial investment trust, it would be worth £7,318.

Patrick Connolly of Chartwell Investment Management, an adviser, likes investment trusts as the charges are lower than for unit trusts. Initial charges on unit trusts are usually between 4% and 5.5%, although you can get a discount if you buy through a fund supermarket such as Fidelity’s Funds Network. They also levy annual charges of about 1.5%.

Investment trusts do not usually charge an initial fee, although you have to pay 0.5% stamp duty. The annual charge is also lower, often between 0.3% and 0.5%.

Connolly recommends the Witan Jump scheme, which is a children’s fund, because it invests in the Witan investment trust. The plan is up 5.47% over the past five years and 76.06% over 10 years.

Owen suggests you start with a British fund such as Lazard UK Alpha or Cazenove UK Growth Income. He also likes Fidelity Special Situations.

Anna Bowes of Chase de Vere, an adviser, picks Fidelity Wealthbuilder. The scheme invests in an average of 12 Fidelity funds, giving immediate diversification.

Some parents prefer to hold their children’s investments in their own name so that they can decide when to give their son or daughter the money.

Alternatively, you can put a unit trust or investment trust into the child’s name. You simply insert the child’s initials on the application form. The investment is then held in a bare trust and legally becomes the child’s when he or she reaches the age of 18.

There are some tax implications, however. If a parent invests on behalf of his or her child and the scheme generates an income of more than £100, it is classed as the parent’s own and could be taxed. Many advisers therefore recommend growth funds for children.