Buying a present for a kid is never easy.

They'll be bored with most toys within a week and they aren't going to like that jumper, no matter how nice you think it looks.

How about giving them an investment?

Sure, a two-year old isn't going to be ecstatic when you hand them a share certificate, but by the time they are buying a first car, they won't be able to thank you enough.

There are a host of investments you could choose from.

Some are tailored especially for kids, others just happen to work to their advantage.

But all of them have different rules, pros and cons that you need to be aware of.

Child Trust Funds

In 2005 the government launched Child Trust Funds (CTFs).

Children born on or after 1 September 2002 received �250 each in vouchers, rising to �500 for low-income families.

A further payment of �250 in vouchers from the government will take place when the child reaches age seven, with children from low-income families receiving �500.

All vouchers must be invested in a CTF - a tax-free savings account - available from a range of companies from April 2005.

Family and friends can contribute additional payments up to �1,200 per year to each account.

The money cannot be accessed until the child is 18 years old.

Parents face the choice of putting the money in the stock market or a savings account.

Shares and Investment Funds

Most investment experts say that if you're going to invest in shares, you should be prepared to hold them for the long-term.

This makes them perfect for kids, who aren't likely to get their hands on them for some years.

But there are some problems.

Firstly, unless you are going to buy a balanced portfolio of shares, you are handing them a relatively risky investment.

Imagine their little faces when they go to pay for college only to discover their fly-by-night.com shares became worthless paper 18 years ago.

The way around this is to buy a managed fund.

These are riskier than savings accounts, but, because they invest in a spread of shares, they tend to be less risky than a single stock.

The second problem with shares or funds is that a child under the age of 18 cannot hold them in their name.

Imagine their little faces when they go to pay for college only to discover their fly-by-night.com shares became worthless paper 18 years ago

There is a relatively easy way around this.

In the case of shares, most large stockbrokers will happily, and for a small fee, set up an account in a child's name over which you have control.

Similarly, most fund managers will set up a fund in a child's name by using something called a bare trust.

This allows an adult to be the named investor, but establishes the child as the fund's beneficiary.

Trust Funds

If you are planning to give a child a significant wad of money, about �50,000 plus, you might want to consider setting up a trust fund.

These are complicated but tax efficient investments.

The advantage is that they allow you a lot of control over how and when the money is eventually spent - handy if you think your kid will blow it all on a gap year rather than their education.

If you are thinking about setting up a trust fund you'll need the help of a financial adviser and/or a lawyer.

National Savings and Savings Accounts

Premium bonds from National Savings, the government's savings organisation, are still the traditional investment gift for children.

They carry the chance of winning �1m, but on average return a pretty poor 3.5% a year. Another option from National Savings is the Children's Bonus Bond.

These offer tax-free returns. The current issue of these bonds is paying 4.8% a year, but the bonds must be held for five years to get that rate.

You could, of course, simply stick some money in a standard savings account.

A child over the age of seven is allowed to open a savings account in their own name.

They will have all the standard tax allowances, which means their first �4,895 (for the tax year 2005/2006) of income is tax-free. This means it is unlikely they will have to pay tax.

Friendly Society Plans

If you want to tuck away a little bit of money for a child each month you might want to take a look at a Friendly Society Plan.

You can take them out in a child's name, they are virtually tax-free and you can save up to �25 a month.

But be warned, you have to commit to a minimum 10 years of saving, and administration charges can be high, so read the fine print.

Stakeholder pensions

It may seem strange to take out a pension for a young child, but with 60 or so years to grow, even a small investment now can give their final fund a healthy boost.

Under the government's stakeholder pension scheme, parents can invest up to �3,600 a year in their child's fund.

Growth in a pension is tax-ree, but the earliest a child can touch the money is 50.

For more information on stakeholder pensions take a look at our guide in the pensions section.

Some other points to remember

If you want to limit tax taken from your child's investment then you are better off investing in assets that are subject to Capital Gains Tax (CGT) rather than income tax.

Every child has an annual CGT allowance of �8,200 a year (for the tax year 2005/2006).

And investments held for a long time incur lower rates of CGT.

For more on this take a look at our CGT guide in the tax section.

Finally, try to keep some flexibility in your child's investment and don't forget to revisit them every so often.

Investment conditions and regulations are changing all the time.

So long as a child can't look after their investments, it really does fall to you to make sure they're getting value for your money.

This information is for guidance only and is not intended to be definitive. Always consult a professional about your particular situtation.