PARENTS who have taken the biggest risks with child trust fund (CTF) vouchers, ploughing money into the Chinese stock market, private equity and smaller companies, have been richly rewarded. But advisers warn the schemes are only for the brave as anything that rises so fast can fall just as quickly.

As the first children to qualify for the government-backed savings scheme begin school, research shows the most successful fund, since launch, has been iShares FTSE/Xinhua China.

The scheme, available via stockbroker Redmayne Bentley, has soared 145% since April 2005, when the first vouchers were invested. A £250 voucher invested in the fund at the start would now be worth about £612.

The results are even better for parents who have topped up the CTFs with a maximum £1,200 each year. Those who invested the initial £250 in April 2005 and an additional £1,200 each April since would today have an investment worth about £6,974.

F&C Private Equity, the third-best performer, has surged 81%. It invests in businesses not listed on a stock exchange. Private companies have produced superior returns in the past few years but the risks are also high.

Smaller-company schemes have also beaten the pack: Mon-tanaro European Smaller Companies has leapt 72% in the past 29 months compared with the average fund, which is up just 41%.

However, the top performers are not for the fainthearted. Jus-tin Modray at Bestinvest, an adviser, said: “It is important not to pick a scheme just because it has performed well recently. The Chinese stock market has seen an exceptional few years of growth, but high returns can often mask the risk involved.

“Some parents may be happy to take this risk because of the long time horizon, but a lot won’t want to gamble on their son or daughter’s future.”

All children born since September 1, 2002, have received vouchers worth at least £250 from the government to be invested in a CTF – so the first have just hit five. Those from poorer families received £500.

The funds, though, were only launched on April 6, 2005. Since then, nearly 3m accounts have been opened.

Children will receive another £250 from the government at the age of seven, and there may be another payment at age 11 or 12.

Parents have a choice of three types of CTFs. Stakeholder products are invested in equities in the early years and gradually moved into lower-risk investments such as bonds and cash between the ages of 13 and 18. The charges on stakeholder schemes are capped at 1.5%.

Many providers also offer a range of nonstakeholder funds, which are standard unit or investment trusts.

The third type of CTF is a cash account, which is just like an instant-access savings account. Gains from all CTFs are tax-free.

Nearly three-quarters of parents have gone for a stakeholder, the government’s favoured option. It believes equities will produce higher returns over 18 years than cash. But because of the risks it recommends moving the money into safer assets as the scheme nears maturity, on the child’s 18th birthday.

Parents have 12 months to invest their child’s voucher after they receive it. If they fail to do so, the government will invest it on their behalf in a stakeholder account. However, parents are being urged to make the decision themselves because if you leave it to the government, your son or daughter will lose out on a year’s growth. Nationwide estimates children have missed out on returns totalling £7.5m since CTFs were launched because a quarter of parents failed to invest their child’s voucher.

If you decide not to make additional payments, advisers suggest that a stakeholder is the best option. Philippa Gee at Torquil Clark, a financial adviser, said: “Because you are looking at low levels of money, I think the best bet is to invest in a stakeholder as the charges are capped.”

Even among stakeholder products performance varies significantly, so you need to choose carefully. Gee suggests Family Investments’ standard stakeholder or ethical stakeholder funds, which are managed by New Star Asset Management. She also likes Children’s Mutual’s scheme, which tracks the All-Share index.

If you plan to make additional contributions, a nonstakeholder product may be a better option because there is a greater choice.

The Children’s Mutual offers a range of schemes from fund managers such as Gartmore, Invesco Perpetual, Insight and UBS Global Asset Management.

Redmayne Bentley offers 10 exchange-traded funds.ETFs are shares traded on the stock exchange that track an index. In addition to the China fund, it offers ETFs that track the FTSE 250, FTSE 100 and Japan’s Nikkei indexes. Property, gold and oil ETFs are also available.

F&C offers eight of its investment trusts, including its flagship Foreign & Colonial fund, up 53% since CTFs were launched.

Katharine and Etienne Ricoux, from Row Town, near Addle-stone, Surrey, have chosen to invest their children’s vouchers with F&C. Alexander, who will soon be five, and an original CTF baby, had his voucher invested in F&C’s main investment trust. Three-year old Isabelle’s money is in F&C’s stakeholder fund and six-month-old Benoît’s voucher has been put in F&C Global Smaller Companies.

Katharine, a 32-year-old housewife, said: “We chose F&C because it has a long track record and decided to invest the children’s vouchers in different funds to add some diversification.”

Recent interest rate rises have made cash CTFs more attractive. Britannia pays 7.5% – 1.75 percentage points above Bank rate. This includes a 24-month bonus of 1.25%. Shepshed and Skipton building societies pay 7.25% and 7% respectively.

Useful websites: childtrustfund.gov.uk

redmayne.co.uk

fandc.com

familyinvestments.co.uk

thechildrensmutual.co.uk

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