Need a last minute gift for the kids? Go ahead buy that Baby Yoda… or invest in their future?

• Since 2020, Stockspot says new investment accounts for kids (opened by Mum & Dad etc) grew by more than 400% over the last two years
• Funds under management in these are up 500% over the same time
• Opening or contributing to kids’ accounts is super popular with grandparents and expats

Wanting a last-minute gift idea for your kids, grandkids, nieces, or nephews without battling the shops?

You could join the increasing number of Australians opening investment accounts for children on investing platforms to help grow their long-term wealth.

It mightn’t seem as fun as a Baby Yoda, one of the most popular toys of 2022, but long-term, an investment account for children will likely be added to and grow.

Down the track it could be cashed in for lots of very cute Baby Yoda’s (whose actual Yoda name is Grogu, also referred to as ‘The Child’), or go towards their education, a house, further investment and all those other responsible actions to be done with a solid nest egg.

Online investment advisor Stockspot, which builds custom portfolios using ETFs, has found the number of investment accounts for children, opened on their platform grew by more than 400% over the last two years. Funds under management in these accounts grew by 500% in the same period.

The magic of compound interest

As none other than Elbert Einstein said:

Stockspot founder and CEO Chris Brycki told Stockhead if you invest $2,000 for your child when they’re born and top up with $100 monthly, they could have $86,500 by the time they’re 21 – assuming of course – a 9% annual net return.

“It’s sustained, long-term growth that you can show kids and get them involved in the top-up process with pocket money,” he said.

Brycki said as these accounts usually involve a longer time frame, they will be exposed to more risk, but it teaches kids about investment cycles and holding assets like gold and government bonds help to cushion the impact of an inevitable downturn.

Popular with grandparents and expats

Brycki said their investment accounts for children have become particularly popular with grandparents.

He said some grandparents even start with as little as $50 which accumulates until the minimum investment amount of $2000 is reached, with the benefit that they incur no management fees until the child’s portfolio reaches $10,000 or they turn 18.

“Aside from looking after their emotional and physical needs, grandparents are increasingly looking at also providing financial support for their grandchildren,” Brycki added.

“Some grandparents are wanting to set up their grandchildren’s financial independence, instead of just focusing on material things like toys and clothes.

“We look at a couple of different investing options to help decide what is the best financial gift you can give a child.”

He said opening or contributing to investment accounts for children have also proven popular option with expats, who rather than worrying about buying and shipping a gift, can just make a simple online transfer.

Alternative to CBA Dollarmite program and investment bonds

Stockspot initially noticed that with the closure of the CBA Dollarmite program in 2021, parents and grandparents saw investment accounts for children as an attractive alternative to leaving money in a low interest account.

Particularly before the simplicity of being able to open an investment account for children on a share trading platform,  investment bonds (also known as an insurance bonds) were also popular.

Brycki said these are a combination of an investment portfolio and a life insurance policy, which can be accessed via life insurers and friendly societies.

He said investment bonds let you invest on behalf of a child and have the ownership automatically transferred to the child at a date you set in the future.

“It’s for this reason that parents or grandparents like investment bonds to help save for big ticket expenses like a child’s education, a car, or house deposit,” he said.

Brycki said investment bonds were also as a tax efficient way, especially for high income earners, of investing outside of super, if certain conditions were met.

“An investment bond is a tax paid investment, which means the tax on investment earnings is paid by the bond issuer at the current company tax rate of 30%,” he said.

“After 10 years from the start date of the investment you don’t need to pay personal income tax on the investment.

“So, if you definitely won’t touch your investment for at least 10 years, you won’t need to pay additional tax or capital gains tax.”

Investment bonds are available across a range of different investment options including shares, bonds, property, infrastructure, and mixed asset portfolios.

Beating investment bond returns

Brycki said average five-year return for a growth investment bond has been 4.7% per year over the 5 years to December 31, 2021.

However, he said a portfolio of ETFs with a similar asset mix and risk – like the Stockspot Topaz Portfolio – has returned 10.4% annually over the same time period.

“This has beaten the average investment bond by over double, that is almost 6% annually”, he said.

Brycki said returns from investment bonds have been poor compared to alternative options like a mix of low-cost ETFs, even when you take the tax benefits into consideration.

“Higher management fees, anything over 1% annually and the tax drag of paying company tax harms returns,” he said.

“Over the last five years, the 5% annual additional returns by investing in a growth Stockspot portfolio would have been enough to cover any tax consequences compared to an investment bond, even if you’re on the highest marginal tax rate.”

The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.