Although children may not be particularly impressed with such a gift now, rest assured they will be extremely grateful when they reach adulthood.
You could just hand over some cash to the child's parents, who might want to use it to top up a Junior Isa on the child's behalf. But if you prefer to make the investment decisions yourself, there is a range of different options.
The right choice of savings or investment accounts will be partly determined by the child's age and the timescale. Gregor Johnston of independent financial adviser Fitzallan, in Glasgow, explains: "If a child is already a teenager, you can't really afford to take any risks so it will have to go into a bank or building society account. But don't just look at children's savings accounts. Look for the account which pays the best rate of interest. It may be easiest to put it into a fixed rate, fixed term account."
Whichever account you choose, remember to register the child as a non-taxpayer using form R85 (available from banks and building societies) so the interest is paid tax-free.
Johnston points out that for younger children, putting money into a savings account is not so suitable as its value is likely to be eroded by inflation. Stock-market investments may be more risky but historically they have often produced better returns than cash and inflation over the long term. The reinvestment of the dividends will add greatly to the returns.
He favours the Vanguard FTSE UK Equity Index fund, a low cost fund which tracks the performance of the UK stock market, available through the Alliance Trust Savings First Steps account for children.
Investment trust groups are particularly good at catering for children's savings. Baillie Gifford has recently celebrated the 10th anniversary of its children's saving plan. Most of those who have taken out the plan have chosen to invest in Baillie Gifford's Scottish Mortgage investment trust, which invests in shares on stock markets all around the world. It has more than doubled in value over the last 10 years.
You can make a minimum lump sum investment of £100 in the Baillie Gifford plan, or regular monthly savings of £25 per month. There is no extra charge for the plan other than the ordinary management fees on the trusts. To encourage Christmas gifts, all new investors who open a Baillie Gifford children's savings plan with either a lump sum investment or a direct debit before January 31, 2013 will receive a £10 Amazon gift card.
Witan, another globally spread investment trust, also offers a children's saving plan called Jump. Marketing director James Frost says: "We find Jump is particularly popular with grandparents around Christmas time. It can be topped up at any time so the investment can be added to on children's birthdays, for example." The minimum initial lump-sum investment in Jump is £250 but top-ups start at £100.
The Association of Investment Companies has a guide to children's investing.
For adults who would like to know that the money they are investing for children is being used ethically, Julian Parrott, of IFA Ethical Futures in Edinburgh, suggests some more unusual ideas. He says: "One option is to support Triodos, the ethical bank, by buying the child one of the bank's Depository Receipts, which has a minimum investment of just £60. Not only will you have the satisfaction of knowing that the money is supporting socially and environmentally beneficial projects, but historically, these receipts have delivered an average return of 4.2% annually."
Another alternative suggested by Parrott is to buy the child shares in a community wind farm through Energy4All. It is possible to invest in the shares of these co-operatives from as little as £250. However, for investors who want to put a child's money into something more conventional, he says: "A plain vanilla investment fund with a good track record and a great story for long term investment is Cheviot Climate Assets fund, which invests in companies providing solutions to the problems of climate change. Investment in this fund starts at £100."
WHEN grandchildren live 12,000 miles away, investing for them on a global basis makes a lot of sense, according to James Chisholm, a semi-retired solicitor from Aberdeen. He has opened child savings plans with Baillie Gifford for his grandchildren, aged four and three, and opted for the Edinburgh-based manager's Scottish Mortgage investment trust.
Chisholm says: "I went for them because of their performance and I guess because of their global reach. Their father visits various places in the course of his job, so a global trust is kind of appropriate."
The long investment horizon for small children is ideally suited to a global trust, Chisholm says, adding: "I think that is the sort of view taken by the trust's manager, James Anderson – it is not a quick fix."