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Child trust funds - are you getting the best return for your child?

Cash-based child trust funds (CTF) have delivered an average growth of just over 10% in the last two years. The average growth for equity based child trust funds however, is over three times as much over the same period.

Moneyfacts.co.uk has reviewed how much an initial investment of £250 would be worth today if it were invested at the start of the child trust fund scheme two years ago. The following chart reveals that cash based child trust funds have on average grown just over 10%, meaning your £250 investment would now be worth £276.

Compare this with the value of equity-based child trust funds. The table below reveals that the average growth of equity-based child trust funds is 34%, meaning that your £250 investment would now be worth £334 - which is nearly £60 more than a cash-based child trust fund.

Child trust funds are booming – with 49,000 child trust fund accounts opened in the first quarter of this year. However, nearly 75% of parents chose to invest their voucher in cash funds, meaning their children could be missing out in the long term.

It's great news that more and more parents are finally taking the time to invest their children's child trust fund vouchers. But, it certainly pays to take a little more time to consider whether investing in cash or equity based child trust fund will deliver a higher rate of return for your child.

But, a word of caution. Whilst the figures indicate that over the last two years equity based child trust funds far outperformed cash based child trust funds, past performance isn’t necessarily a guide to the future and equity based child trust funds can go up as well as down, so are a higher risk compared to cash child trust funds.

You can invest up to a maximum of £1,200 per year into a child trust fund, but stashing away all of your child’s savings into a child trust fund may not be a sensible move. All the money gets handed over to your child when they turn 18, and you can’t access it before then. Also, with the total value of child trust funds likely to be worth millions of pounds in 16 years time, who knows what the Government of the day will decide to do with the money?

So, our message is clear – make sure you invest your child trust fund voucher straight away, but consider the following strategy:

1. Investing your £250 child trust fund voucher into an equity-based child trust fund involves a higher degree of risk, but could potentially deliver a higher longer term return for your child;
2. You can offset the risk by saving money regularly into a tax-free mini-cash ISA, which then puts you in complete control over when your child can access the money.

What to do next:

• Read our guide to child trust funds
• Read our guide to mini cash ISAs
• Check out our Savings accounts best buys for cash child trust funds, equity child trust funds and mini cash ISAs