Buying into mutual funds with little cash up front
Here's a Christmas gift idea that's likely to leave a toddler unimpressed, but could delight his parents: mutual-fund shares.
The "Gift of Growth," brochure by Fred Alger Management Inc., a New York-based mutual-fund group, asks: "How many gifts have the potential to pay for a college education, buy a first home, or fund a comfortable retirement?"
Answer: "Not many."
"This has caught on more than we imagined," says James Connelly, a vice president of the firm, which manages $21.5 billion in assets. Alger began its gift program five years ago, and has 35,000 accounts as a result.
Many major mutual-fund firms now offer parents, grandparents, uncles, aunts, and others a relatively simple way to give shares to their children and other young kin.
"It's so easy," says Mr. Connelly, who personally started an account for a niece in his sister's name. "It takes one minute to fill out the application."
It's a different kind of "stocking stuffer," notes the no-load Pax World Balanced Fund, which prides itself on making socially responsible investments
Like Alger, Pax World provides gift givers with documentation to set up an account and a special fancy card to send along to the recipient (or his or her parent). "This is the kind of gift that keeps going," says Mariann Murphy, marketing director for the $1.2 billion Portsmouth, N.H.-based fund group.
"Time is on your side," says Reginald Green, a veteran consultant to the mutual-fund industry. If a parent or someone else makes regular small contributions to the account, "it can add up to a heck of a lot of money."
Such a gift has an advantage over cash or a gift certificate in that it doesn't just vanish with a purchase, Mr. Green adds.
One factor mutual-fund givers should consider is the minimum initial investment. Pax World requires $250 to start an account - a generous gift for many. Alger allows an account to be opened with any amount - $10 or whatever.
"You almost always see additional deposits to this sort of account," says Connelly.
Dozens of mutual-fund companies require $250 or less, according to Morningstar, a Chicago mutual-fund research firm. But not all are suitable for custodial accounts.
In the United States, gifts under $10,000 ($20,000 if from a married couple who file jointly) within a calendar year are not subject to a gift tax. A common form of ownership for children under the age of majority (18 to 21 depending on the state) is to open the account under the Uniform Gifts/Transfers to Minor Act. The form requires the child's Social Security number and the name of the custodian legally responsible for administering the account until the minor reaches the age of majority.
Usually a parent is the custodian, and her or his signature will be required on the form. If so, the form will need to be sent to the parent along with a check to purchase shares in the fund - and the gift card.
Uncle Sam doesn't tax the first $700 of income of a child under 14. Taxes on the next $700 are paid at the child's rate. Unearned income over $1,400 is taxed at the parents' rate. For a child 14 or older, all unearned income over $700 is taxed at the child's rate.
Another factor to consider before giving mutual-fund shares is sales fees, or "loads."
Pax World, for instance, is no-load. Alger has three classes with varying loads. Its shares can be bought directly, but are mostly sold by broker dealers. They regard gifts for children as an excellent way to either introduce the concept of mutual funds to an investor or establish a solid relationship with an investor.
That firmer tie will often prompt a client to bring more money to the broker for investment, notes Connelly.
Both Pax World and Alger have funds that are rated highly for performance by Morningstar. The giver may want to choose an aggressive-growth fund if the child is young and can wait out the ups and downs of the market before needing the money for education or whatever.
If the youngster is well into high school, a more conservative fund may be appropriate, suggests Connelly. Check with your financial planner.
(c) Copyright 2000. The Christian Science Publishing Society