Best Mutual Funds for Kids
How to Get Kids Started Investing With Mutual Funds
The best mutual funds for kids are not unlike the best types of funds for any other beginning investor. The basic steps to get kids started investing include opening a minor account and choosing the appropriate fund for the child's investment objective. In this article, we'll cover the best account types and the types of mutual funds ideal for minor children.
What Are the Best Investment Account Types for Kids?
Assuming the child is below the age of 18, they'll generally need to open a minor account to get started investing. In some cases, minors can open an individual retirement account (IRA). Adults, such as a parent, can also open investment accounts on behalf of their minor child. Typically these accounts are for education savings or other long-term goals.
Here are the main types of accounts minors can use for investing:
- UGMA/UTMA: Accounts established under the Uniform Gift to Minors Act (UGMA) or the Uniform Transfer to Minors Act (UTMA) can be used for investing in securities, such as stocks, bonds, or mutual funds, on behalf of a minor. Whether you open an UGMA or an UTMA depends on the state of your residence.
- Roth IRA: Children may qualify to open an Individual Retirement Account (IRA) if they have earned income. For example, if they do yard work or babysit for a summer job, and claim this income on a tax return, they could start their own IRA and begin saving for retirement.
- Education Savings Account: Also called a Coverdell Education Savings Account or ESA, this account is used to save and invest for college expenses or other certain qualified education expenses. Earnings grow tax-deferred and withdrawals are tax-free, if used for qualified expenses. An adult custodian opens the account on behalf of the child. The annual contribution limit for an ESA is $2,000.
- Section 529 Plan: These qualified tuition plans are sponsored by states and are authorized by Section 529 of Internal Revenue Code. Many 529 plans allow for investment in mutual funds. These plans may offer tax benefits that vary by state.
Investing for Kids Can Start 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:
- Index Funds: Passively-managed index funds that track a broad market index, such as S&P 500 Index funds, can be a great place to begin building a portfolio of mutual funds. This is because most of these funds have extremely low expense ratios and they provide exposure to dozens or hundreds of stocks, representing various industries, all in just one fund. Vanguard, Fidelity, T. Rowe Price, and Charles Schwab are some of the best known investment companies for index funds.
- Balanced Funds: Also called hybrid funds or asset allocation 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. 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 or decade. 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. For example, a 15-year old child, investing at Vanguard and expecting to retire in about 45 years, could invest in Vanguard Target Retirement 2065 (VLXVX).
How Kids Can Get Started Investing With $50 or Less
One drawback of some mutual funds is that they require a minimum initial investment of up to $1,000 or more to get started.
Here are some diversified mutual funds with minimum investment of $50 or less:
- Schwab Balanced Fund (SWOBX): Balanced fund that invests in a mix of stocks and bonds. No minimum investment required.
- Fidelity 500 Index Fund (FXAIX): S&P 500 index fund investing in approximately 500 of the largest U.S. companies. No minimum investment required.
- USAA Target Retirement 2060 (URSIX): Target retirement fund for individuals expecting to retire in about 45 years. Allocation will start with allocation of mostly stocks and gradually shift toward bonds as the target year approaches. Minimum initial investment is $50 when establishing a systematic investment plan.
The Bottom Line
There are multiple account options and types of mutual funds that can be used to get kids started investing. From education savings accounts sponsored by an adult to IRAs in the child's name, kids can take advantage of compounding interest and build wealth over time. Be sure to choose the appropriate account type and type of mutual fund appropriate for your child's goals.
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.
USAA. "Save For a Child's Future With a Custodial Account." Accessed April 15, 2020.
Fidelity. "Fidelity Roth IRAs for Kids." Accessed April 15, 2020.
Charles Schwab. "Education Savings Account." Accessed April 15, 2020.
Vanguard. "Vanguard Target Retirement Funds." Accessed April 15, 2020.