Will child trust funds split up the family?

This month's high-profile launch of the new child trust funds will have left many parents facing something of a dilemma.

Only children born after August 31, 2002 are eligible for the new scheme, so there will be thousands of families where the youngest child is getting the free government cash while older ones miss out.

Many parents may feel that while it's great they have been given a head start with the younger child, they will have to set up some investment for the older one.

Little Sophie Guy is a child trust fund babe, but older sister Chloe doesn't get anything because she was born five months before the September 1, 2002 eligibility date.

Sophie, who is nearly 15 months old, will benefit from a £268 government handout in the form of a voucher which can be used to open a CTF account. Her parents Vanessa and Simon will receive the voucher in the next few weeks.

Mrs Guy, 32, of Wokingham, Berkshire, says they will probably plump for a Nationwide building society CTF cash savings account for Sophie. This pays interest at 5%, with an additional 1% annual bonus for those who pay an extra £5-plus a week.

Chloe, who is three in March, may not be getting the government cash, but she still has her own little nest-egg. She already has a savings account, and any money given to her on her birthday or at Christmas is paid into this.

What are the options that parents and grandparents looking to set up a non-CTF investment for an older child might wish to consider?

If you don't want to invest in shares, there are a number of bank and building society savings accounts offering pretty decent rates including Halifax Monthly Saver (5.55%), Chelsea building society's Ready Steady Save (5.1%), and Nationwide building society's Smart (4.95%).

The government says the stock market is where you need to be when it comes to long-term investment, because shares "almost always produce a better return than savings accounts". If you subscribe to that view, there are a number of unit trusts and investment trusts that are aimed specifically at children. One of the more well-regarded is Jump, the children's scheme from Witan investment trust, which allows people to make regular and lump sum payments - minimum monthly contribution is £25. For each investment there's a 1% dealing fee which is subject to a minimum charge of £1.25 (plus 0.5% government stamp duty).

However, many experts reckon parents should look beyond products targeted at youngsters, bearing in mind an investment such as a unit trust can be held on behalf of a child and 'designated' with their name or initials.

Ben Willis at independent financial adviser Chartwell Investment Management says that because the money is being invested for such a long time, he would probably go for something at the riskier end of the spectrum. Two funds he particularly likes are Schroder UK Alpha Plus and Cazenove UK Dynamic.

Schroder UK Alpha Plus was launched in 2002 and aims to provide capital growth through investment in 20-40 stocks, currently including HSBC and Tesco. The minimum monthly contribution is £50, and there are 1.5% annual and 5.25% upfront charges.

Cazenove UK Dynamic is run by the experienced Neil Pegrum and many people have high hopes for it. But the fund doesn't offer a regular savings scheme: minimum initial investment is £1,000 and the minimum payment after that is £500. Charges are 1.5% and 3.5%.

Patrick Connolly, at IFA John Scott & Partners, takes a different tack. He says many parents won't want to go for something highly speculative.

He recommends a large international investment trust, where your money is spread across different sectors and geographic areas.

Mr Connolly pays £40 a month into two international investment trusts managed by Baillie Gifford - one is called Scottish Mortgage and the other The Monks - for son Aidan, who is three in April.

Baillie Gifford runs a children's saving plan allowing people to invest from £30 a month per trust. There are no initial or annual charges above those in the underlying funds and stamp duty, but there are charges for withdrawals and transfers.

Another fund favoured by many experts is Fidelity's giant Special Situations fund, run by Britain's best-known investment manager, Anthony Bolton. Minimum monthly contribution is £50.