Review of research papers in child development revealed young children who are looked after by their grandparents develop better than those placed in expensive nurseries.
It also revealed that spending time in a loving family environment could help boost children's vocabulary and make them more emotionally secure.
While the experience of being in a more formal setting such as a nursery can help prepare children for starting school, even this was not a major advantage in the long term, the study carried out by the Institute for Fiscal Studies and the Nuffield Foundation added.
The researchers, led by Caroline Bryson, a social scientist, said that half of children whose parents both work are looked after at least part of the time by relatives, usually grandparents.
When they go to primary school the proportion increases to 60 per cent as grandparents step in to provide care after school ends and before parents get home from work.
While the cost of childcare was a factor in parents asking their own parents to look after their children, it was not the only factor, the review found.
One study the researchers reviewed asked parents to rank what motivated them to chose grandparents with "trust" coming top followed by "love".
Another set of data collected from children born in the year 2000 appears to show that those looked after by their grandparents "experience slightly higher vocabulary development in the early years, the Telegraph reported.
"There is also evidence of a positive association between socio-emotional development and being looked after by grandparents among more educated families. This was still apparent when the children reached age five," the report added.
But the opposite appeared to be the case among children from disadvantaged backgrounds who benefited overall from formal childcare.
While being in formal childcare did appear to make children initially more "school ready", the researchers added: "We should note that being cared for by grandparents did not significantly put children at a disadvantage in school readiness compared to children not in formal childcare, but rather that it provided no advantage, while formal childcare did."
The study noted that while the number of children being looked after some of the time by their grandparents has increased overall in the last 10 years, the amount of time they spend with them has actually fallen.
This is put down to the availability of free preschool care for children over three but which only covers a limited number of hours.