An investment gift might not make a 6-year-old's face light up Christmas
morning the way Power Ranger figures would, but it will undoubtedly mean more 10 years from now than any toy.
You don't have to give thousands to make a significant contribution to a child's future. Think of this: $250 placed 10 years ago in Twentieth Century's Giftrust Investors, an aggressive-growth mutual fund that can only be used for gift-giving and requires a minimum 10-year investment, would be worth $2,295 as of Sept. 30. "The magic of starting early is unbelievable," says Charles Carlson, a financial analyst and author.
Investing for kids also has tax benefits. First, parents and grandparents can each give a child up to $10,000 a year tax-free and reduce their taxable estates. For children, the first $600 in unearned income is tax-free, and the next $600 is taxed at the child's rate (usually 15%). Above $1,200, a child under age 14 pays the parent's rate. You must act as a custodian, or designate one, until the child reaches age 18 or 21, depending on your state's rules governing uniform gifts (or transfers) to minors. Most banks, brokerages, and fund companies have free materials describing custodial UGMA/UTMA accounts.
TOYS AND GUM. Financial entities are marketing to children more and more, creating special programs to appeal to kids. In May, SteinRoe launched its Young Investor Fund, which targets 65% of its portfolio to stocks that are familiar to kids or touch their lives, says co-manager Lawson Whitesides. Current holdings include McDonald's, Coca-Cola, and Duracell. A minimum $1,000 investment in a custodial account includes a quarterly newsletter, simplified prospectus, and coloring book (for kids age 7 and under). Since its inception, the fund has returned 6.3%, while the Standard & Poor's 500 has netted 4.5%.
Local banks also offer savings accounts for kids that usually come with minimum deposits of $1 to $10, no fees, and various incentives to save. Credit unions often waive minimum-balance requirements on children's savings accounts. KeyCorp's DinoSaver account includes activity books, an 800 line, and plastic toy dinosaurs to collect. "Grow'N Up Savings," from Interchange State Bank in Saddle Brook, N.J., comes with free gifts and an I.D. card. Plus, kids who refer a friend to the program get $1 deposited into their account.
But you don't need coloring books and newsletters to get a child excited about saving. You can pick an investment with educational value, then help the child follow its growth. Individual stocks may be easier for kids to relate to than mutual-fund shares. Like SteinRoe's fund, you should choose companies with products kids are interested in.
Many stocks give shareholders goodies--"one more thing that can make investing interesting for kids," says Carlson, who wrote Free Lunch on Wall Street (McGraw-Hill, $14.95). Walt Disney discounts memberships to the Magic Kingdom Club Gold Card Program; Wrigley sends 20 free packs of gum each year. Buying a few shares can be costly, but if you have a relationship with a broker, he or she may be willing to buy a share or two at a discounted commission. Look for dividend-reinvestment programs, which allow shareholders to buy additional stock commission-free.
BIG BANG. Mutual funds, which offer low-cost, simple investing and instant diversification, may be the easiest choice. Although most funds have minimum initial requirements of $1,000 to $2,500, many companies reduce them on custodial accounts. Vanguard lowers its threshold to $500, Strong and Janus to just $250. Check with fund companies to see what other provisions they make for gift-giving. At Franklin, you can buy gift certificates that allow the recipient to choose the fund. Strong will send a holiday card as notification of a gift.
If the child lacks any investments, pick a diversified growth fund. But if the child has other funds, consider taking a flier on something riskier, like an emerging-market fund or a sector fund with good long-term prospects, such as one investing in technology or health care.
If equity investing makes you queasy and you really just want to help out with college tuition, U.S. savings bonds may be appealing. They come in denominations of $50 to $10,000, boast a floating rate with a minimum yield of 4% if held for at least five years, are free of local or state tax, and let investors defer federal tax. Zero-coupon bonds timed to mature around age 18 are another conservative college-planning option, as are Treasuries (five-year T-bonds yield about 7.75%). However, for the most educational bang for your buck, as well as the best long-term results, equities are probably the investment gift of choice for kids.