Giving a mutual fund at Christmas could start a child on a lifetime of investing

Your Funds

December 12, 2004|By CHARLES JAFFE

If you're tired of fighting traffic, can't find the right thing for your kids online or simply want to try to give a gift with a purpose this year, go fund shopping.

There are no lines, no congested parking lots and a huge selection, but there are also a few twists to navigate and decisions to make.

With that in mind, here's a holiday shopper's guide to giving children funds as gifts.

For starters, enter the gift-investment process knowing that your favorite funds may not be available as "the perfect gift."

Many fund companies have established "gift of shares" programs. Following the lead of Franklin Templeton and Alliance, these generally amount to a card or certificate good for a formal presentation, along with a pledge to make an investment in the recipient's name.

The recipient typically gets to pick the fund of his or her choice from within the fund family.

The Monetta funds go a bit further with the Monetta Express program, which combines strong educational materials with nice gift items and low minimum investments. The problem is that the company's funds are nothing to rave about; three of the six offerings get a one-star rating from Morningstar Inc. and none gets more than three stars.

There are a few funds constructed specifically to be given as gifts, but they generally are the investment equivalent of a cheesy, dreadful holiday necktie. American Century Giftrust (ticker TWGTX) is one of the worst funds ever, but the real issue of the few funds of its ilk is that they require investors to keep their money in the fund for a decade or more.

Unless you are looking to say "Happy holidays in 2015," don't go to these funds this year.

There are two funds - Columbia Young Investor (SRYIX) and USAA First Start Growth (UFSGX) - designed to be given to young or starting investors. While the funds have materials designed to help newbies, neither has performance that is particularly compelling and both have costs that are above average.

Next you get down to using your ordinary mutual fund as a gift, with no special card or program other than the one you make up yourself.

It's not as easy as choosing your favorite fund, because most gifts are small-dollar transactions, and that may force you to look for funds that have a low minimum. This gets tricky, because funds with little or no required initial purchase tend to have above-average expenses.

To find mutual funds with a low minimum investment, go to the Web site of the Mutual Fund Education Alliance at www. mfea.com or check out the "fund selector" feature at Morningstar.com and combine the lowest required investment with other features you like in a fund.

It's entirely possible, however, that a low-cost diehard trying to give $100 to a nephew might have to buy a fund they would not own themselves. The decision, therefore, may come down to whether buying a fund with above-average costs is worth doing if it helps to teach the recipient about investing.

If you pick your own fund, there are some issues yet to resolve.

Unless you are acting as custodian for a minor child - or have that person in cahoots with you on the gift - you can't actually "buy" the fund shares. The gift recipient has to sign the paperwork, which is why "gift of shares" programs wind up being little more than a card and a prospectus.

One thing you can do is deposit the money into a college savings program, but because the money will then have to be used on qualified educational expenses - and not for something the child might consider as a "gift," that may not be the option to draw the biggest reaction when it's opened.

Pick your investment, get the prospectus and fill out the paperwork and write the check, so that the whole thing is ready to go in the mail moments after the present is opened.

Remember, too, that the best way to ensure that your gift achieves a goal of teaching something about funds is to include a bit of your investment philosophy and wisdom. Include the list of factors that led you to make your choice, or pick the fund together with the recipient and start their file with the list of buying factors plus the prospectus.

Follow up with the occasional progress report and you may spark an interest in investing that lasts well beyond the life of this year's hot toy, doll or video game.

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