Junior ISAs (JISAs) have become an increasingly popular way to give children a financial head start in life. But many account holders are missing a very important point.
A total of £1.5bn was deposited into Junior ISAs during the 2021/22 tax year, with nearly half (42%) going into cash (source: HMRC).
In my opinion, this is a missed opportunity to grow substantial wealth for your children.
So where should you invest your child’s £9,000 annual JISA allowance?
Is it best to be cautious or can you take a more gung-ho approach with the investment choices? The longer investment horizons for most JISA investors means you can usually afford to embrace a greater degree of risk in the hope of better returns.
1) Smaller companies
I’m a big believer in smaller companies. For starters, they typically outperform their larger rivals over time. This is because they’re often young, innovative companies and not closely followed by analysts. The fact many of them are focused on rapid growth in exciting sectors such as technology means there’s always the chance they will surprise on the upside.
It’s also where I invest a chunk of my daughters’ JISA, so I take a particularly keen interest!
Such outperformers will be rewarded by sharp increases in their stock price – and this is the dream scenario for fund managers operating in this space. Those looking for UK exposure to this space might consider IFSL Marlborough UK Micro Cap Growth or Liontrust UK Smaller Companies.
The case for smaller companies can be made around the world. The US is particularly attractive for those looking to gain increased exposure away from the mega-caps but still have access to the world’s largest economy.
I’d highlight T. Rowe Price US Smaller Companies Equity, which has a flexible approach to investing in the small and mid-cap space.
Throwing the net even further afield is the abrdn Global Smaller Companies fund, which identifies smaller companies from all around the globe, including emerging markets. The fund currently has roughly half the portfolio in the US but further exposure in Japan, Australia, Germany and Taiwan (source: fundsheet) to name a few.
2) Emerging markets
Everyone knows stock markets are extremely volatile places and that putting your money to work in developing areas carries an even higher risk of potential failure.
However, these exciting, unpredictable and rapidly growing regions can also provide tremendous rewards for those whose investment horizons are measured in decades.
Nowhere is this more relevant than global emerging markets, by which I mean the likes of India, Mexico, Taiwan and South Africa, for example. For broad exposure to this region I’d point to FSSA Global Emerging Markets Focus. The fund has returned 29.5% for investors since launch in 2017, outperforming the sector by 17.5% (source: FE Analytics).
Another approach to emerging markets is through single country funds. These are generally another step up the risk scale, but I believe that India has tremendous long-term potential. This makes it an ideal consideration for a JISA.
There’s no doubting that India is on something of a charge. In 2022/23, for example, its real GDP expanded at an estimated 6.9% (source: The World Bank 2024), and the country’s integration into the global economy only continues year-on-year.
One option for investors is the UTI India Dynamic Equity fund. UTI is an India-based asset management firm that was launched 21 years ago and benefits from being able to conduct on-the-ground research.
3) Technology
The final area I’d highlight for a JISA is technology. Technology rules our world these days, including my kids’ world!
From an investment perspective, the most ground-breaking developments can revolutionise sectors and transform fledgling firms into multi-billion dollar corporate giants.
It means that canny investors who put their faith and money into such businesses at an early stage can be on course to enjoy bumper returns.
Whether you’re looking to buy tomorrow’s potential winners through funds such as IFSL Marlborough Global Invocation or the latest trend in artificial intelligence through the Sanlam Global Artificial Intelligence fund, there’s technology options for every investor.
I also find that investing in technology is an easy way to engage my kids in their JISA and learn what their mum does everyday. It’s a win-win for everyone.
Juliet Schooling Latter is research director at FundCalibre and Chelsea Financial Services
Related: Trick to beat market-leading cash ISA rate (if you’ve £10k to save)
