Say you invest $500 for a child in a fund that posts a 10% annualized return. That investment will grow to $1,296 in 10 years, $3,363 in 20 years, and $58,695 in 50 years. The child could use that money to help pay for college, buy a house, start a business — even retire early. Bet you wish somebody had given you mutual fund shares as a kid.
What’s more, your gift might help start the child on a lifelong path of saving and investing — a habit that can’t begin too early. “It’s extremely important that children learn about money,” notes Robert Steffen, a financial planner in Bloomington, Minnesota. “If they see early on that the money they invest will grow, they’ll be more likely to make intelligent financial decisions.”
Some Useful Tips
Choosing a mutual fund from among the more than 12,000 that exist can seem like a daunting task. But when it comes to investing for a child, a few tips can help you find the right fund quickly. For example:
• Choose a kid-friendly fund. Find a fund that invests in companies that make things kids like computers, cell phones, running shoes, toys and so on. That way, the child is more likely to take an active interest in the fund. You can find out the types of companies a fund invests in by calling its sponsor. Alternatively, check out Morningstar.com, which features detailed information on more than 11,000 mutual funds.
• Look for funds with low minimum investments. Some mutual funds require an initial investment of $1,000 or more. That’s fine if you can afford to spend that amount on the child. Otherwise, you’ll want to find a fund with a lower minimum. Many fund companies offer automatic investment programs, some of which allow investors to purchase as little as $25 worth of shares as long as they commit to contributing the same amount every month going forward. Fund families that offer low minimum automatic investment programs include T. Rowe Price (800-638-5660), Strong (800-368-1030), Invesco (800-525-8085), Putnam (800-225-1581), AIM (800-959-4246) and Columbia (800-547-1707).
• Stick with stocks. You’ll probably want to buy shares in a stock mutual fund, assuming the child won’t need the money for at least five years. That’s because stocks tend to outperform all other types of assets over the long run. For example, a $100 investment in large-company stocks back in 1926 would have grown to roughly $284,563 today. That same amount invested in intermediate-term government bonds would be worth only around $4,315. “Stocks are the best investment for generating the growth that investors — especially young investors — need to reach long-term goals such as buying a house or paying for retirement,” says Steffen.
Longer Term Funds
If the child won’t need the money for 10 or more years, you may want to consider a fund that invests in volatile sectors of the market such as technology or telecommunications. Reason: High-risk investments offer the best potential for long-term growth. What’s more, the wide price swings that may accompany such an investment will help teach the child important lessons about investment risk.
It’s easy to find plenty of funds that meet these three criteria. One fund that specializes in kid-friendly stocks is Stein Roe Young Investor (800-338-2550; no load). The fund invests most of its assets in shares of companies that affect the lives of children and teenagers, such as Walt Disney, America Online and Apple Computer. It has posted a roughly 70% better return that its average peer during the past five years — and the minimum investment is only $100, plus $50 per month thereafter.
Another Option
You might also consider a fund that invests in a particular industry that the child likes. For example, if your child wants to be a doctor or nurse, there’s Putnam Health Sciences (800-225-1581; 5.75% load), which invests in a broad range of companies in the health care field. The fund has posted a 20.6% annualized return during the past 10 years. Minimum investment: A mere $25, plus $25 each month.
Finally, if the child is interested in foreign cultures or languages, check out funds that invest overseas. Some solid options with low minimums include T. Rowe Price Japan (800-638-5660; no load; minimum: $50 + $50/month) and Evergreen Latin America (800-343-2898; 4.75% load; minimum: $250 + $25/month). These funds can post big losses when international markets run into trouble, but they offer the potential for outsized gains over long periods.
