YOUNG children prefer sweet-ies to savings, and chocolate beats cash hands down. But as the Child Trust Fund (CTF), the Chancellor’s “fiscal baby”, celebrates its second birthday, parents are urged to consider the day when their child takes an interest in their savings.

All children born on or after September 1, 2002, are entitled to a £250 payment, or £500 for lower-income families. What their parents decide to do with this cash will have a stark impact on their child’s life when he or she turns 18. Some children could be left with as little as £350, while others may enjoy windfalls of tens of thousands of pounds.

One sure-fire way to boost your child’s returns is to add cash to their account. Add £10 a month and you could boost your child’s eventual windfall to nearly £5,000, assuming investment growth of 7 per cent, according to figures from the Children’s Mutual. Pay in £100 a month, and your teenager could be entitled to more than £37,000. Less than a quarter of CTFs currently receive regular monthly top-ups, according to the most recent figures from Pima, the Pep and Isa manager’s association.

But it is also crucial to make sure your child’s money is in the right place. More than three quarters of CTFs sent out in 2005 were invested by families, according to recent figures from the Treasury. But experts say that parents should not relax once they have decided on a home for their child’s savings.

Caroline Hawkesley, of Evolve Financial Planning, the independent financial adviser, says: “Parents who are hoping to use CTFs to help their children out in the future need to take an active interest in these accounts. They shouldn’t be afraid to switch if they are unhappy with the performance or fees. Alternatively, their attitude to risk may change in years to come, and this should be reflected in their choice of funds.”

Cash CTFs can look attractive compared with typical rates offered on standard savings accounts. Yorkshire Building Society currently offers the best-buy CTF rate of 6.8 per cent. But investing in cash is unlikely to garner high returns in the long run.

Put your child’s £250 cheque in a cash account with an average return of 4.5 per cent and there will be just £350 to spend once inflation has taken its toll by the 18th birthday, according to figures from Evolve. Putting the cheque in an investment fund paying an average of 9 per cent will leave your child with more than double this sum after inflation and management charges.

David White, the chief executive of the Children’s Mutual, says that the society does not offer a cash account as it does not believe it is the right choice for parents. “The major reason we do not have a cash fund is that we believe families want their kids’ money to work hard, and this means getting exposure to equities. As children approach the age of 18, they can decide to move more of their money into cash if they wish.”

There are two ways of gaining exposure to equities. Parents can choose a stakeholder account, or a nonstakeholder CTF. Both charge fees, but the charges on a stakeholder account are capped at 1.5 per cent a year. Many providers charge the full 1.5 per cent, but F&C charges a more modest fee of 1.17 per cent, although this fluctuates.

Parents who have chosen Scottish Friendly’s managed growth fund, a stakeholder fund, should give themselves a pat on the back. The fund is among the best performers over the past two years, growing by 40 per cent. But even the stakeholder offered by RBS and Natwest, which has been one of the least impressive over the past two years, has grown by more than 20 per cent, far more than the returns from cash accounts. But it is worth remembering that parents have benefited from a bullish market recently.

Some parents who took the adventurous route with their child’s CTF have been the most richly rewarded. Invesco Perpetual’s UK Smaller Companies Equity Fund via the Children’s Mutual has been one of the best performing nonstakeholder CTFs so far. It has grown by more than 60 per cent over two years. There is a trade-off for returns as shiny as this however. Like most nonstakeholders, Invesco charges an initial fee of 5 per cent and a 1.5 per cent annual management charge.

Experts say that regardless of how well your child’s investments are doing, keeping a close eye on your fund is key. Not only can the performance tail off, but the charges may change, making it less competitive. There is usually no charge for switching to a rival fund, although you may have to pay an initial investment fee if you decide to move to a nonstakeholder account.

Ms Hawkesley adds that parents should not be spooked by a downturn in the markets. “If the market suddenly dips, parents need to remember that they are taking a long-term view and over an 18-year period one would expect to achieve a positive return far in excess of cash. However, it is important to establish whether the fund has dropped in value due to general market movement, or to the fund being badly managed.”

CASE STUDY

BABY GROWS JAKE GREY’s Child Trust Fund is being boosted each month by six members of his family. The 13-month-old, pictured with his parents Mary and Nick Grey, receives £60 a month into the account from his grandparents, uncle, aunt and parents.

Mrs Grey, a 35-year-old marketing executive, says: “Jake is the first grandchild, so he has been inundated with presents and clothes. Everyone is desperate to buy him more gifts, but he doesn’t need anything extra, so we suggested that they could instead pay into his CTF each month.”

The couple, who opened a stakeholder CTF with the Children’s Mutual, received a £20 Mothercare voucher for each direct debit that was set up. “They came in very handy. We are first-time parents, so you never quite know what is needed when, so it was nice to have some vouchers to use.”

The couple chose the Children’s Mutual because they liked the fact that the society concentrated solely on CTFs. “In the blur of the first few weeks we didn’t do anything with the cheque, but once we looked at the comparisons we made up our minds quickly.”

Jake can draw on the savings when he turns 18. “Its for Jake to decide how he spends this money. He may not use it for university fees — he may want to pay a deposit on a flat, or buy a car. It’s about hopefully enabling him to have options,” Mrs Grey says.

“We have the direct debit set up — over time those direct debits might need to be increased. We’ll be mindful of knowing the level of the investment. We want to make sure we are reaching the threshold every year,” she adds.