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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 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 in a fund
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 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 more likely to hold stocks of companies the kids know. 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 can use MSN Money's Easy Fund Screener or Morningstar's Premium Fund Screener to find funds with low minimums in addition to any other criteria you want. 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.
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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, or AIP, in which 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; not only does it allow them to start investing without a lot of money to start, but it will teach them how quickly that nest egg can grow when additions are made regularly. You can find out whether a fund has an AIP (many do) by looking on the Purchasing Information page of its Morningstar report, and you can also use the Premium Fund Screener to screen for funds with AIPs.
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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. Morningstar's free Mutual Fund Screener lets you screen for funds with expense ratios below their category average, and the Premium Fund Screener allows for more-detailed expense screening.
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.
Continued: Some funds to consider
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