Investing is kid’s stuff

At Morningstar, we’ve often emphasized how important it is to start investing early in life. Not only does it give you a big head start in building a nest egg for a first home, a college education, or retirement, but learning good investing habits early on can also have a big positive impact for years. That’s why it’s an excellent idea for parents to teach their kids about money and investing.

Ultimately, there’s no better way for kids to learn about investing than by doing it themselves, whether it’s with money they’ve saved on their own or money given to them by a parent or other relative. Traditional tools such as summer jobs and savings accounts are still important, but mutual funds can also be an excellent way for older kids and teenagers to learn the value of a buck. Not all mutual funds are right for young investors, but with a little thoughtful research it’s possible to find some that kids can feel at home in.

What to look for

Broadly speaking, when helping kids invest in mutual funds, it’s best to keep things simple. Focus on stock funds rather than bond funds, because kids have very long time horizons and can take on plenty of risk. Large-cap stock funds are generally best; not only should they form the core of any long-term portfolio, but they’re also more likely to hold stocks of which the kids have heard. Kids will generally have no need for sector funds or other niche funds.

Young investors generally don’t have a lot of money to throw around, so a fund that requires $5,000, $10,000 or more upfront is effectively closed to them. There are plenty of funds with minimum initial investments of $1,000, $500, or even $250, making them much more welcoming for beginners. You might want to eliminate load funds; some of them have low minimums, but they’re not appropriate if you’re going to make lots of small purchases, as kids probably will.

Often it’s possible to start with an even lower initial investment — sometimes as low as zero — if you set up an automatic investment plan where you arrange to automatically add a certain amount (such as $50) to the account each month. This can be a good option for kids with jobs that provide a regular income; it allows them to start investing without a lot of money to start, and will also teach them how quickly that nest egg can grow when additions are made regularly.

Low expenses are a feature any fund investor should look for, and you’ll be doing kids a favor if you instill in them early the importance of fund costs. This can be trickier than it seems at first, because the cheapest funds can sometimes have high minimum purchases; still, kids can’t go wrong if you steer them toward low-cost funds whenever it’s feasible.

Finally, it’s often considered kid-friendly for funds to avoid alcohol, tobacco, gambling or pornography stocks, because some parents or grandparents might not feel comfortable having kids investing in such businesses. Columbia Young Investor, a pioneer among kid-friendly funds that’s soon being merged away, has always had such restrictions on its portfolio, as does its rival USAA First Start Growth.

This is a more personal standard than the other ones above, and it is one that parents might want to discuss between themselves and with their kids.

With all this in mind, here are some funds to consider if you have a child or teenager who’s dipping his or her toe into the waters of investing. Of course, these aren’t the only kid-friendly funds out there, but this list provides a good starting point for young investors.

• USAA First Start Growth

Now that Columbia Young Investor is on the verge of disappearing, this will soon be the only mutual fund explicitly geared toward young people. It’s not without its drawbacks; its 1.45 percent expense ratio is high for a large-cap fund, and 25 percent of its assets are now in bonds, a higher percentage than most kids probably need. But manager Mark Baribeau avoids alcohol, tobacco, and gambling stocks, and you can start an automatic investment plan for no money upfront and just $20 a month, one of the most kid-friendly plans out there.

• TIAA-CREF Equity Index

Index funds have a place in any investor’s portfolio, and kids are no exception. The big kahunas among index funds, Vanguard 500 Index and Fidelity Spartan 500 Index, are very cheap but have minimum initial investments of $3,000 and $10,000, respectively, putting them out of most kids’ reach. This fund from TIAA-CREF has a minimum initial investment of $2,500, but that minimum is only $50 if you set up an automatic investment plan that invests $50 a month. Plus, this fund only costs 0.26 percent a year — not as cheap as the Vanguard or Fidelity funds, but still cheaper than most index funds and nearly all actively managed funds.

• Vanguard STAR

If you want to teach kids about the importance of low fund expenses, there’s no better place to start than Vanguard. Some of Vanguard’s most popular funds (such as 500 Index) are geared more toward older, more experienced investors, but Vanguard STAR is a good option for beginners. It provides exposure to 11 different Vanguard funds of various asset classes, including significant foreign exposure, and its track record is outstanding. A major factor in that good track record is the fund’s rock-bottom 0.36 percent expense ratio. It does require a $1,000 initial investment, with or without an automatic investment plan, but nearly all other Vanguard funds require at least a $3,000 minimum, making this the best entree into this world-class family of funds.

• Pax World Balanced

This is one of the best socially responsible funds out there, with a strong long-term track record and reasonable expenses. It also has a very low $250 minimum initial investment, whether or not you set up an automatic investment plan, making it an attractive starter fund. The fund keeps 25 percent to 45 percent of its assets in bonds, which makes it a bit conservative for most kids’ needs, but it also provides significant mid-cap and overseas exposure, which can be hard to find in socially responsible funds.

• T. Rowe Price Spectrum Growth

This fund of funds is a good way to obtain diversified, actively managed stock exposure. It invests in nine different T. Rowe Price equity funds ranging from small to large cap, value to growth, and domestic to international, and it has compiled one of the best long-term records in the large-blend category. Plus, like all T. Rowe Price funds, it’s friendly to beginning investors; you can start an automatic investment plan with just $50 to start and $50 a month after that.

• Ariel Appreciation

This fund has struggled lately, but we have enough confidence in veteran manager John Rogers that it remains an Analyst Pick in the mid-cap-blend category. Rogers avoids tobacco, firearm and nuclear-energy stocks and prefers firms that are environmentally friendly and cultivate diversity. It’s also an easy fund for youngsters to get into; you can set up an automatic investment plan with no money upfront and $50 a month thereafter. On top of all this, Ariel maintains a number of educational initiatives to help disadvantaged young people.