Stocking Stuffers That Offer Profit Potential

A partridge in a pear tree? Four calling birds? Seven swans a-swimming?

You can sing about these Christmas gifts all you want. But what if your true love (especially children, nieces or nephews) needs something that will last, pay interest, appreciate in value or teach them about managing money?

Stocks, savings bonds, mutual funds or investment guides still make great gifts. And some can be purchased for minimal amounts--amounts that could grow through the years.

Here are some suggestions for potentially profitable stocking stuffers:

- Stocks. Normally, buying only a few shares of IBM or AT&T; can be expensive in terms of commissions--and stockbrokers give you dirty looks because it’s a hassle for them to handle such small orders. But some brokerage houses will allow you to buy small numbers of shares for minimal fees.

Merrill Lynch’s downtown Los Angeles office, for example, charges only a $2.35 handling charge--and no commission--if you want to buy one to three shares of stock, says John R. Queen, a senior resident vice president. (He cautions, however, that not all Merrill Lynch offices offer this program.)

“It’s a fun thing; we’ve done it for a long time,” Queen says. Kids’ favorites include shares in Walt Disney and Mattel, he says.

Another suggestion: If you have stocks that have appreciated in value over the years, consider giving them to your children if they’re age 14 or over. That will save you taxes, because capital gains can be taxed at their usually lower rate.

- Mutual funds. These will give your loved ones more diversification for the money and could cost you less in sales charges if you choose the no-load variety.

There are hundreds of good funds to choose from. But some also allow low or no minimum initial investments, are free of sales charges and boast good long-term performance records.

One group with no minimum investment requirement is Twentieth Century (800/345-2021). Its Twentieth Century Select fund, which invests in growth-oriented firms, has gained 42.9% in the past year and 696.7% for the past 10 years, ranking it fifth among all funds in that period, according to Mutual Fund Values, a Chicago service that tracks fund performance.

That group also offers Twentieth Century Giftrust, a fund specifically designed for parents to buy shares for their kids. The fund will set up a trust to hold your child’s shares, keeping the child from tapping the funds for a new stereo set or other unintended purpose. The trust also provides tax advantages. The flip side is that the trust must be held for 10 years or until your child is 18, whichever comes later. And it is irrevocable, meaning you can’t take the money back for yourself.

Another strong-performing group with no minimum investment requirement is the Janus group of funds (800/525-3713). Its value-oriented Janus Fund is up 50.4% in the past year and 672.8% for the past 10 years, ranking it seventh for the decade.

Of course, past performance is no guarantee of future results, particularly for these aggressive funds. But if you’re giving investments to young people, it’s not a bad idea to give them aggressive stock funds that--while volatile in the short run--have the greatest profit potential over the long term. It’s not as though your kids will be retiring next year and need the cash right away.

Stocks and mutual funds also are ideal vehicles for saving for your kids’ college education through custodial accounts set up through the Uniform Gifts to Minors Act. The act allows you to manage investments for your children. Again, your kids can’t access the investments immediately, so they can’t run off and use the proceeds for frivolous purchases.

- Savings bonds. OK, you insist, the stock market is for gamblers. You want something safer and more stable.

Savings bonds can do the trick. These have always been great gifts, in part because you can buy one very conveniently from your local bank for as little as $25. They are not taxable until maturity and are backed by Uncle Sam’s full faith and credit.

Soon, there will be an added incentive to put a savings bond under your loved one’s Christmas tree: Starting in January, the yield from Series EE bonds will become free of federal tax (they are already free of state and local tax) if you use the proceeds to fund your child’s college education and you meet certain income criteria.

To qualify for a complete tax break, you must have modified adjusted gross income--including Social Security and retirement income--below $60,000 for couples and $40,000 for singles at the time you cash in the bonds. You can still get a partial tax break if your adjusted income falls below $90,000 for couples and $55,000 for singles.

Another hitch: To qualify for the tax break, you have to hold the bonds in your own name, not your child’s.

- Gold. Prices of this precious metal have taken off lately, triggering a mini-buying spree in gold bullion coins, whose values fluctuate with the market price of gold. Smaller sizes of these coins are suitable for rings, charm bracelets, cuff links, stick pins, earrings, necklaces and other jewelry.

The hottest new bullion coin is the Australian Kangaroo Nugget, which is minted on only a limited basis (possibly giving it greater appreciation potential) and comes in a presentation capsule that keeps it in mint condition, says Bruce L. Kaplan, president of Kaplan & Co., a precious metals consulting firm in Santa Monica. The Kangaroo comes as small as 1/20th of an ounce, which can be bought for about $40.

If you want to support Uncle Sam, then stick with the American Eagle bullion coin.

- Investment books and periodicals. Instead of giving a stock or coin, why not make your friend an informed, up-to-date investor first?

Subscriptions to such investment magazines as Money and Changing Times or such newspapers as the Wall Street Journal or Investor’s Daily are often popular.

Among investment books, there’s a lot--maybe too much--to choose from. However, if you had to pick one from among the plethora of new entries from this year, go for “One Up on Wall Street: How to Use What You Already Know to Make Money in the Market” by Peter Lynch with John Rothchild (Simon & Schuster, $19.95).

Lynch is the superstar portfolio manager of Fidelity Magellan Fund, this past decade’s top-performing mutual fund. The book, which provides tips on stock investing from one of the best stock pickers of all time, is entertaining, full of common sense and oriented to the novice investor--although it’s still a bit heavy for kids.