It pays for an early start to saving for the young ones

Start investing for a baby as early as possible and encourage it to pop away some money as soon as coins make sense.

Don't forget to protect the family first. A financial umbrella to

ensure your dependents are looked after is essential.

Make a will and take out enough cover – both income protection and term assurance. This should be sufficient to pay off any mortgage and provide an income or lump sum. A good rule of thumb would be the value of the home loan plus 10-15 times the family income.

By putting money aside as early as possible for a child, your investment can potentially benefit from compound growth. This means growth not only on the original money but on the return created.

If 1,000 were to be invested now, it would make only 338 interest in five years (assuming six per cent average annual return) but, if left in for 45 years, the last five years would bring in 3,479.

The Child Trust Fund (or CTF) should be the first consideration. Every child born on or after September 1, 2002 receives 250 (double for families on low income) as a voucher to be invested in an approved scheme.

Each year up to 1,200 can be contributed by anyone. As it is not restricted to the parents, any godparent or friend can make a payment. On the seventh birthday, a further 250 is added by the Treasury (again double for families on benefits).

Five million accounts are now running and David White, chief executive of CTF specialist The Children's Mutual, says many more families are now making regular contributions than in pre-CTF days.

No income tax or capital gains tax is liable on the fund. As the money cannot be accessed until the 18th birthday, avoid cash schemes. Only one (Hanley Economic Building Society which pays a variable five per cent) actually beats inflation – which is 3.7 per cent.

With a long time span, opt instead for a stock market investment. Just putting in 100 a month over 18 years will produce an impressive 38,281, assuming six per cent annual growth.

There are two such paths: a straight-forward shares account and a 'stakeholder' one (where the money is transferred into low-risk areas like gilts and cash from age 13 and charges capped at 1.5 per cent). The former may actually have lower fees but the key point is to enjoy performance and not curtail it part way through.

Foreign & Colonial, which set up the first investment trust, offer a selection. Opt for one of its international funds, notably F&C Private Equity and F&C Global Smaller Companies which have risen 89.8 per cent and 53.7 per cent respectively in five years to the end of 2009.

For a real spread, consider a tracker which seeks to replicate a published index. The FTSE 100 rose 22.1 per cent last year. Children's Mutual, F&C Investments, Halifax and Nationwide offer them.

Starting a pension is an excellent and overlooked route for a child. Putting in 2,880 a year, the Treasury will top it up to 3,600. While this should create a wonderful sum, under current legislation it cannot be accessed until 55 years and only a quarter can be taken as a tax-free cash sum.

Create a bare trust which means the money placed within it is legally the property of the child. It is a very simple procedure with two adults acting as trustees.

It is free of inheritance tax provided donors survive for seven years after making a gift.

Place such money in either a spread of shares or a collective, such an investment trust, exchange-traded fund or OEIC (open-ended investment company).

Diversification is essential. A blue chip group can be global. In fact, over 70 per cent of earnings in FTSE 100 companies comes from overseas.

Skipton Financial Services, part of Skipton Building Society, recommend a fund of funds approach. It particularly likes: Henderson Multi-Manager Income & Growth and Thames River Cautious Managed.

Ensure at least one-third is invested in expanding economies.

Two funds to consider are BlackRock Latin American, the only London-listed investment trust focused on the region, which has returned 245 per cent over the last five years, and JP Morgan Brazil Investment Trust which starts trading on April 26.

Traditionally, products from National Savings & Investments are considered child-friendly. Only one fits that bill: Index-linked three year certificates which pay one per cent plus RPI on 100-15,000.

Avoid its Children's Bonus Bond as it pays only 2.5 per cent and locks the money into this derisory rate for five years.

Instead buy a bank or building society's permanent interest-bearing shares through a stockbroker. They currently pay seven to 10 per cent such as 7.50 per cent (Nationwide), 8.60 per cent (Coventry) and 9.54 per cent (Skipton). Remember to complete Inland Revenue form R 85 to ensure all interest is received without tax being deducted.

A friendly society tax-exempt savings plan runs for at least 10 years but can be for 18, 21 or even more years. Most are with-profits funds which invest in property (usually commercial), a spread of shares and fixed interest.

Up to 25 monthly or 270 annually can be invested. Annual returns can exceed 14 per cent. Look particularly at Sheffield Mutual, Druids Sheffield and Leeds-based Kingston Unity.

Children's regular savings accounts can be a good short-term route. According to Moneyfacts research, Halifax is the top payer with a fixed six per cent on 10-100 monthly for any child up to 15 years. Principality at a fixed five per cent is next best on 10-150 monthly. Each runs for one year but both providers let new accounts to then be opened.

Finally, for small sums – such as pocket money – a bank or building society children's account is practical and can bring good opening gifts. The best rate is five per cent on Bath Building Society's Futurebuilder and Yorkshire Bank's Child Savings Bond.

The latter is fixed for five years, accepts from 50 and earlier closure incurs a 10 penalty.

For less interest but a free money box, consider Dunfermline (0.10 per cent), Earl Shilton (0.50 per cent), Market Harborough (1.50 per cent), Monmouthshire (1.25 per cent), Principality (0.90 per cent), Saffron (1.50 per cent) and Stroud & Swindon (0.25 per cent).

Building up a nest egg

Jennie Carroll from Roundhay, Leeds, saves monthly for her two

daughters as an investment for the future.

"It should provide a good nest egg for university or a wedding," says 34-year-old Jennie.

She chose Halifax's Children's Regular Saver which pays a market leading fixed six per cent interest. Any child from birth up to 15 years qualifies.

Jennie has buildings and contents insurance with Halifax and was attracted by the rate on the children's account and modest monthly sum required of 10-100. The first account was opened for Niamh when she was just eight months old at the Halifax Headrow branch in Leeds.

The second account – for daughter Maeve, now two – was started online. For both accounts, 10 is paid in but Jennie hopes to raise the level shortly.

After 12 months, the proceeds go either into the Save4it account or a nominated account held by an adult on the child's behalf. Then a new monthly plan can be started.

Halifax launched the account at 10 per cent in 2004, reduced it to eight per cent in late 2008 and to six per cent in April 2009.