Why parents are turning to bonds for kids

Micro-investing app Blossom has launched Blossom for Kids, a new feature that allows adults to invest in a professionally managed bond fund on behalf of children.

Once the minor turns 18, they can switch the investment into their name with the permission of the account holder, which can hold up to 10 accounts.

"With Blossom for Kids, we're removing barriers by offering access with minimum investments as low as $5," says Blossom co-founder Gaby Rosenberg.

"Parents can easily establish accounts and track progress alongside their children, turning financial literacy into a hands-on experience."

Does Blossom for Kids charge fees?

Blossom (and now Blossom for Kids) is free to join. There are no fees to open an account or transfer money in or out.

Instead, Blossom makes its money through management fees based on how returns are calculated so you don't get charged directly.

The investor gets the return first (up to 6.50% p.a.), and after that Blossom takes a small cut (up to 1.2% p.a.) to cover fund management and operating costs.

If there's any extra return left, Blossom takes the cut. That helps them top up the fund if returns fall below the target, smoothing things out for users.

The rise of kids' investing apps

The idea of investing for kids isn't new. In today's world of cost-of-living concerns, the housing crisis and climate change, many parents and grandparents want to know how best to squirrel away some money for the future.

While kids can't legally own investments in their own name, parents, guardians or trusts can open accounts on their behalf.

That concept has taken off over the past five years, with micro-investing platforms like RAIZ, Spriggy Invest and SelfWealth offering child-friendly versions of their equity or ETF-based products.

Where Blossom differs is its focus on bonds, a traditionally low-volatility asset class that many retail investors have struggled to access.

Rosenberg says the idea for Blossom came after watching institutional investors pile into fixed income during the pandemic while ordinary Australians were locked out.

"All these other beautiful asset classes had already been democratised through technology or app-based investing. Through the Stakes and Coinbases," Rosenberg told Money in a recent feature.

"We thought, maybe we can take that idea and use it to democratise fixed income, so that it can become an important part of retail investor portfolios."

Why bonds for kids?

On the risk-return scale, bonds typically sit between low-risk cash products and higher-risk equities.

Types of bonds include:

• Government bonds, used to fund infrastructure and public programs
• Corporate bonds, issued by businesses looking to raise capital
• Municipal bonds, from local councils and state-backed initiatives

By investing in a bond, you're essentially lending money to the issuer, and earning regular interest payments (known as "coupons") in return.

The asset class essentially aims to provide predictable income without too many ups and downs in capital value.

"This may make it a suitable long-term holding for the type of activities that resonate with both parents and children - such as funding education, first-home deposits, gap years, holidays or just building savings from a child's own efforts," says Rosenberg.

Still, it's worth comparing returns.

The app's accounts, Blossom Save and Blossom Plus, currently target 5.45% p.a. and 6.50% p.a. respectively. That's often below the average returns for most equities; the 10-year average return of the S&P/ASX 200, which sits at 8.70% according to BlackRock.

But the trade-off is less volatility and consistency.

Teaching money the slow and steady way

Beyond the returns, Rosenberg believes bonds can help close Australia's financial literacy gap, particularly for kids.

Around 8.5 million Australians (45% of the population) are considered financially illiterate, according to the HILDA survey.

That's based on just three basic concepts: understanding compound interest, inflation, and diversification.

"Bonds, with their slow and steady growth, help instil the importance of patience and the rewards of disciplined investing," she says. "It's a much gentler - and safer - introduction to the financial world than the often wild ride of cryptocurrencies or speculative stocks."

What's more, Rosenberg says this hands-on experience with bonds can boost a child's financial confidence and provide the perfect springboard for understanding more complex investments down the track.

What are the risks?

No investment is risk-free, and fixed income has its own vulnerabilities.

Blossom says rising interest rates, inflation and the potential for issuers to default on payments to investors are among the biggest risks in fixed income.

"But a competent fixed interest fund manager can build portfolios that help weather those risks producing optimal outcomes over time," Rosenberg says.

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