Experts said parents were often not fully aware of investment risks
A third of a billion pounds has been wiped off the value of Child Trust Funds in the past year, figures obtained by the BBC suggest.
Since 2002 the government has given every newborn £250, which parents can invest for their child's future.
Three out of four put the money into accounts which were invested in shares.
But figures show their value has fallen by an average of 29% over the past year. The government said historically shares earned more than cash savings.
A Treasury spokesman said: "The Child Trust Fund is a long-term investment over an 18-year period and the first Child Trust Fund accounts will not reach maturity until 2020.
"Although shares can go down as well as up in value, particularly in the short-term, the historical evidence is that they provide a better return than cash savings for long-term investments."
Emma Clark followed the government's advice for her child and said as a result, her fund had lost in the region of £200.
She told the BBC: "We chose a stakeholder account on the basis of government literature.
"It was the middle road of three routes and we liked it because it was fixed management charges of 1.5%, and it also allowed investment in shares.
"And the government had said in their literature that over the last 40 years every 18-year cycle of shares investment had done better than savings, ordinary savings accounts.
"Well, over the past year in total we've paid £825 into the account. And I rang up for a valuation and we were given a figure of £613."
Roddy Kohn, from investment advisers Kohn Cougar, said investing in shares carried a large amount of risk and that people should not invest on the stock market if they were not prepared for that risk.
He told the BBC: "Basically, consumers have been taken to the cleaners by the investment community.
"The biggest problem with Child Trust Funds now is that it's quite evident that many people have invested their money in the stock market without understanding risk.
"Consequently when they're seeing these losses they're upset by it.
"The truth of the matter is if you haven't got the stomach for risk, if you don't understand what risk is, then don't invest this money in a stock market-invested Child Trust Fund."
Liberal Democrat treasury spokesman, Vince Cable, said as a result of the BBC-obtained figures, people would be put off saving for their children - exactly the opposite objective hoped for by the government.
He told the BBC: "The irony of this whole exercise is that a scheme that was primarily designed to encourage people to think about long-term savings, may have exactly the opposite effect.
"Because if - for the first time in their lives - people have actually saved money and they've saved it through this scheme and they've lost a lot, the lesson they're going to learn is this is not a very sensible thing to do."
But Miles Bingham from Family Investments - which looks after more than 500,000 Child Trust Funds - said parents should not worry.
He told the BBC: "History always shows that the stock market returns better than cash accounts in the long term. And parents need to remember that these accounts are going to last for 18 years.
"In fact the first one won't even mature until 2020. So it's a long time to go between now and then."