How to buy Mutual Funds for Your Children

Mutual Funds are portfolios of stocks, bonds and cash that are pooled together for investment. These portfolios of assets are managed by a professional Mutual Fund company. As an investor you own a portion of the fund and participate in the ups and the downs of the fund’ s performance.

There are thousands of funds available for mutual fund investing; therefore research is needed to find the most suitable ones for your child's gift. Mutual Funds make sense as investments for children as they are safe, cost effective and professionally managed.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• Internet
• Some money

1. 
   mutual fund investing

   Set the criteria that is important to you in a Mutual Fund company. For example, how long has the company being in business, industry reputation, flexibility,fees charged. Know the difference between the various type and class of funds. As a general rule if your goal is to minimize cost, and also have investment flexibility you should pick an Open End with No Load fund. The fund’ s criteria are personal to each investor, but keep in mind that you are investing for a child and that his/her needs are different from your own. Also learn the stock market.

2. 
   mutual fund investing

   Make use of the free information in Morningstar online to help you with setting criteria in step 1. This service allows you to screen Mutual Funds companies and their respective funds according to various criteria. Morningstar assigns ratings to Mutual Fund companies and their respective funds and it is independent. Also, use the free information from Yahoo and Google Finance to research your companies and find out about fund expenses.

3. 
   mutual fund investing

   Decide which Mutual Fund company you are going to invest in for your child. Keep in mind the cost of investing in the Mutual Fund companies. Keeping the cost low and low fees and no commission allows for the child to keep more of the return on her investment in the future. Also, look to invest in companies with a long history and good reputation and that are individual investors oriented.

4. 
   mutual fund investing

   Decide which fund or funds within the company you are going to invest for your child. Keep in mind that this is a long term investment for the child. There are stocks, bonds and other type of funds to invest in. Since this is for long term, I will recommend buying stock funds. There are many domestic and international funds, and sector specific or mixed funds. For example, you can decide to buy into a fund that invests in large domestic corporations or one that invests in small corporations. You can also be sector specific, investing in an energy fund or a technology fund. There are hundreds of combinations in the mutual funds universe to choose from. Using the services of Morningstar referenced in step 2 will aid you in screening all these mutual funds.

5. 
   mutual fund investing

   Set up an automatic monthly investment with a Mutual Fund company. Once you have decided which mutual fund company and which fund you are investing in for the child, the account needs to be funded. Using automatic monthly deposit is a good way to keep cost low and to spread the cost across different time spans. Many companies allow automatic investment of as low as $50.00 per month and they waive the initial minimum investment if you enroll in the automatic investment plan.

6. 
   mutual fund investing

   Reinvest the gains and the dividends the fund pays out for the child. Make sure the dividends and gains are reinvested back in the fund, the company will automatically purchase more shares for the child’s account with the payout. The fund company will even buy fraction of shares when the money is not enough to buy a full share.

7. 
   mutual fund investing

   Invest in a retirement account now for your child. I know it sounds odd to set up a retirement account for a baby or a young child, but the earlier she starts the bigger the payoff over time. Mutual Fund companies now have retirement specific funds that anyone can invest in. For example if you are investing into a fund for a 10 year old child, you may buy her a retirement targeted fund with maturity of 2035, 2045, 2050 whatever date you prefer. The child can use these funds for education, for purchasing her first house or for her actual retirement. These funds are different from IRAs or 529 education funds.

Tips & Warnings

• Always consider the risks of investing.

[Gardengates]

on 1/4/2009 Excellent article on buying mutual funds for children -- or for anyone! Thanks!

[zadsdonna]

on 1/4/2009 So many great tips! Thanks for all the info.