More than 10m children are too old to qualify for the government’s tax-free child trust fund (CTF), but financial firms bombard parents with plenty of other options. Friendly societies even include details of their investment plans in the “baby bags” parents take home from hospital after their child’s birth.

With so many schemes on the market, performance varies widely and picking the right fund can make a big difference to your child’s nest egg at 18. The top-performing fund over the past 18 years is the small Discretionary Trust. If you had put a lump sum of £250 into the fund at birth, followed by monthly savings of £100 for 18 years, you would now have £120,880. If you had chosen the worst performer over the same time, Lincoln Japan, you would have £18,076.

So how do you pick the right investment? Most experts recommend that you invest in the stock market. If you are saving for a child, you could be putting money aside for 10 years or more — and over the long term equities beat cash hands down. Shares have outstripped cash in all but one 18-year period since 1899, according to the Barclays Equity Gilt study.

Mark Dampier of Hargreaves Lansdown, an adviser, said: “If you are investing for a child over the long term, you don’t really need to worry about diversification. I would put all my money into equities.”

You can also afford to take a bit more of a risk with your children’s savings. Dampier said: “You have plenty of time to ride out any ups and down in performance, so I would be happy to recommend a slightly more adventurous fund to parents of young children.” Dampier is more than just talk: he has put money for his own son into an emerging-markets fund.

Another advantage of slightly more aggressive funds is that they tend to pay a lower dividend income, which makes it less likely you will fall foul of the £100 rule (see panel). This states that if a parent pays into a fund on behalf of a child, any income above £100 is taxed at his or her highest rate.

There are broadly three types of equity investment for parents: friendly- society plans, unit trusts and investment trusts.

Friendly societies waste no time in pushing their plans on parents as soon as babies are born. The schemes have an apparently big advantage — they are tax-free. But you have to work hard for that. You can invest up to a maximum of just £25 a month, and you must pay into the plan every month for 10 years.

Most friendly societies also invest your money in a with-profits fund, where it is is spread across a range of assets, including shares, property and gilts. However, the schemes have been widely discredited.

Anna Bowes of AWD Chase de Vere, another adviser, said: “If you set up a friendly-society savings plan, you have to be sure you can keep it going for 10 years — and be sure you want to invest in a with-profits fund.”

Don’t let the tax perk sway your decision. It’s quite easy to set up a unit or investment trust for your child that will be tax-free.

Unit trusts, or open-ended investment companies (Oeics), as they are sometimes known, are simply a way of pooling your money with other investors to buy a broad spread of shares. And they are much more flexible than friendly-society bonds.

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