There's a 10 percent penalty on investment gains if the money is taken out for noneducation purposes. This is like a mutual fund wrapped in a stripped-down life insurance policy, typically one that protects against loss of the funds originally invested. You could invest in an annuity for your grandson through a custodial account. And the 10 percent penalty on early withdrawals might discourage him from raiding the account. The situation seems to be improving, however.
Trusts offer the most flexible way to provide for a minor.
You could give the assets to the recipient at any age you like. But taxes would not take much of a bite if you invested in growth stocks or funds that don't make large annual payments, such as dividends or capital gains distributions. Trusts, unfortunately, can be expensive to create, usually requiring a lawyer. There are, however, some mutual funds that are prepackaged trusts with little or no setup charge. The big drawback is that you'd be tying up your money in one investment for a very long time.