Squabbles ahead in the sixth form

Mine's bigger than yours. We're not talking conkers, boyfriends or A-level results, but the first batch of child trust funds (CTFs), which will mature in September 2020.

The gap between the relative values of these accounts, which will finally be activated in April this year, could be a yawning one, say independent financial advisers, providing the opportunity for squabbles in the sixth form common room.

There is not only the chasm between those accounts where only the basic state amount of £250 (£500 for poorer families) is invested and those topped up to the maximum £1,200 a year (total £21,600 over 18 years), but between those with a good or bad investment.

Parents can choose a deposit account, stock market or stakeholder CTF. All providers must offer access to a stakeholder fund, which is the default option for parents who make no decision about where to put the initial CTF money.

Under the stakeholder rules, the fund manager invests in the stock market initially, in most cases, using an index-tracker fund, and then offers 'lifestyling' by switching the money to less risky investments as the child gets older.

For children whose parents choose to leave the cash in a deposit account CTF, they will find there may be little to boast about. Anna Bowes of investment adviser Chase de Vere, based in Bath, Somerset, calculates that a saver who earned the best interest available on a deposit account over the last 18 years would have seen £250 grow to £948. For those who saved the cash in an average-paying account, the same investment would have grown to just £688.

Had the £250 been invested in a collective stock market fund instead, the results would have been wildly different. Using figures from information group Hindsight, Chase de Vere found that the best-performing collective fund over the last 18 years was Fidelity European Growth, turning £250 into a spanking £3,719. But even the cash deposit saver would be better off than the stock market investor who gambled their £250 on the Legal and General Barclays Japan trust - their investment would have halved to £121 over 18 years.

No one knows what will happen to the stock market in the future, and a child could still end up invested in a fund that underperforms a savings account. Bowes adds: 'There are some people who either do not understand or feel uncomfortable with equities so they are better off with cash. For them there are some good rates around including Britannia building society's account paying 6 per cent, including a 1.25 per cent bonus for the first two years. For parents prepared to top up the account there is Nationwide's CTF paying a basic 5 per cent but an extra 1 per cent for those adding at least £240 a year.'

But Bowes reckons the stock market is the best place to be for such a long-term investment.

One attraction of CTFs is that it is easy to switch plans. She warns: 'The danger is that someone who starts off with a deposit account and then sees the stock market rise sharply may decide to switch to an equity plan too late, missing out on the growth. Then there is the risk they may see their investment fall and switch out again, losing twice.'

Of all the funds available, Bowes prefers managed CTF funds to index-trackers and particularly likes some of the dozen offered under the Children's Mutual umbrella, including Invesco Perpetual Income Fund and Gartmore Cautious Managed. For a higher risk investment, she likes Foreign and Colonial Investment Trust.

For more information visit www.childtrustfund.gov.uk