Best Mutual Funds for Kids
How to Get Kids Started With Mutual Funds
The best mutual funds for kids are not unlike the best funds types for any other beginning investor. The basic idea is to find a smart place to start and to select the funds based upon the child's investment objective, which will primarily derive from the number of years to invest. Often, this is a long-term objective, meaning that stock mutual funds can be the best funds for kids to get started investing.
This particular article does not address saving for education specifically but rather focuses on the idea of children getting their first start with investing. This assumes the holding period is long term, which is more than 10 years and possibly as much as 20, 30, 40 or even 50 years.
Also keep in mind that children may qualify to open an Individual Retirement Account (IRA) if they have earned income. For example, if they do yard work or baby sit for a summer job, they could potentially start their own IRA and begin saving for retirement. Use the power of compounding interest! The earlier they start investing the better.
Why S&P 500 Index Funds Can Be Best Investments for Kids
The best S&P 500 Index funds can be a great place to begin building a portfolio of mutual funds because most of them have extremely low expense ratios and can give you exposure to dozens or hundreds of stocks representing various industries in just one fund.
Therefore, you can meet the initial goal of getting a low-cost, diversified mutual fund. For more on index funds, check out our Index Investing FAQ page. Again, Vanguard, Fidelity and T. Rowe Price are good mutual fund companies for index funds. You can also look at Charles Scwhab.
Investing for Kids Often Starts With Just One Mutual Fund
If you want to take the most simple route and invest with just one fund, there are a few options that work best in terms of keeping costs low and diversification broad:
- Balanced Funds: Also called hybrid funds or asset allocation funds, balanced funds are mutual funds that invest in a balanced asset allocation of stocks, bonds and cash. The allocation usually remains fixed and invests according to a stated investment objective or style. For example, Fidelity Balanced Fund (FBALX) has an approximate asset allocation of 65 percent stocks, 30 percent bonds and 5 percent cash. This is considered a medium risk or moderate portfolio. This balance of stocks and bonds provides good diversification in just one fund.
- Target Date Mutual Funds: Also called life-cycle funds or target retirement funds, Target-Date Mutual Funds invest in a mix of stocks, bonds and cash that is appropriate for a person investing until a certain year. As the target date approaches, the fund manager will gradually decrease market risk by shifting assets out of stocks and into bonds and cash, which is what an individual investor would do manually themselves. Therefore, target-date mutual funds are a type of "set it and forget it" investment. For example, if you are saving for retirement and think you may retire around the year 2035, a good choice for you might be Vanguard Target Retirement 2035 (VTTHX). Then you can end your research, periodically add new money to the fund, and watch your nest egg grow as you go on about living your life!
How Kids Can Get Started Investing With Just $100
One drawback of most high quality mutual funds is that they require a minimum initial investment of up to $3,000 to get started. However, Charles Schwab has several quality mutual funds with minimum initial investments of as little as $100. Here are some of the best:
- Schwab Balanced Fund (SWOBX): Balanced funds can be an ideal way for beginners to start investing because they are a diversified blend (a balance) of stocks, bonds and cash. In different words, balanced funds can be a complete portfolio in themselves! The Schwab Balanced Fund has an asset allocation of roughly 60 percent stocks, 35 percent bonds and 5 percent cash. This makes for a moderate (medium-risk) blend appropriate for most investors. SWOBX is typically an above-average performer and has a minimum initial investment of just $100.
- Schwab S&P 500 Index (SWPPX): It's hard to go wrong with an index fund with a minimum initial purchase amount of $100 and a rock bottom expense ratio of just 0.09 percent, which rivals that of Vanguard funds. At 100 percent stocks, investors will need to be able to hold on during the inevitable bear markets, when stock prices can decline by 20 percent or more in just a few months' time. However, the long-term (more than 10-year) returns of stock index funds are among the most competitive of all mutual fund types.
- Schwab International Core Equity (SICNX): If you are wanting to expand your portfolio to include foreign stocks, this fund is among the best of no-load funds with a minimum initial purchase of $100. SICNX invests in large-cap stocks (large companies) that are outside of the United States. Long-term performance ranks are high compared to other large-cap international funds.
Another way to get a reduction in the minimum initial investment amount is to contribute through an IRA and commit to a systematic investment plan. With this arrangement, you can get started investing with as little as $100, as long as you continue investing on a regular basis.
Now go out and get those kids started investing!
Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.