My favoured approach is to establish an investment portfolio for the child, with the assets held in the name of the parent / grandparent on trust for that child.  This is mainly due to the fact that it is almost impossible for minors to own assets personally.  The portfolio starts off with a cash management account, into which the parent or grandparent deposits their initial gift.

I then generally recommend the investment of those funds into a Listed Investment Company such as Australian Foundation Investment Company (www.afi.com.au), Argo Investments (www.argoinvestments.com.au) or Milton Corporation (www.milton.com.au).  These companies invest in a broad portfolio of quality Australian shares, are conservative in their style, and offer the opportunity for investors to automatically reinvest dividends.  They are also very low cost, with management expenses totalling less than 0.2% of the assets invested.

The use of listed investment companies does mean the portfolio is 100% invested in the Australian share market, and is therefore subject to the ups and downs associated with owning shares.  However, as very long term shareholders, these short term fluctuations are relatively minor in the context of the accumulation of wealth. 

The key to the strategy is the compounding of the investment returns over time.  If you were to invest $2,000 into AFIC shares now for a newborn, and invested $1,000 every birthday, then they could have shares worth around $43,000 at their 18^th birthday.  This is based on current share prices and dividend rates, with dividends reinvested.  In my projection, I have conservatively presumed dividends would rise 4% each year, and the share price appreciates 3% each year.  Not a bad outcome for $20 per week!

Imagine the power of this strategy if the child then kept it up for their whole life – by the time they reached their 55^th birthday they could have a portfolio worth in excess of $1 million.  Of course, inflation should be considered over such a long timeframe, and if inflation averaged 2.5% over that time period then the real value of their asset would be around $270,000 – not too bad for an investment of $57,000 over the years.

Tax is also something to keep in mind.  The Australian Tax Office has provided guidance on issues surrounding ownership of shares for children on its website at http://bit.ly/1sydgbo .  The key issues are:

• Ensuring the correct Tax File Number is quoted;
• Declaring the dividends received; and
• Considering the capital gains tax consequences when the shares are transferred to the child at age 18.

The information provided above is General Advice only and you should seek advice from a suitably qualified adviser prior to implementing any of the strategies discussed.