MUTUAL FUNDS / RUSS WILES : Why Not Give a Gift That’s Also an Investment?
The long Thanksgiving weekend marks the traditional kickoff of the holiday shopping season. If you dread the thought of crowded malls, shudder at the idea of having to return items that don’t fit or simply don’t know what to buy, how about presenting a mutual fund as a gift?
You can invest in any of several dozen funds for as little as $250. Some will accept minimum investments of $100, $50 or even less. At those prices, you probably wouldn’t want to buy a mutual fund for the office gift exchange, but the idea makes sense for a close friend or relative, especially a child.
You can, of course, make this sort of gift at any time. Common occasions include graduations and births. “But interest seems to pick up around the holidays,” says Virginia Marans, a spokeswoman for the Franklin Group of Funds in San Mateo, Calif.
For relatively small amounts of money, it’s usually much wiser to make a gift of mutual funds rather than common stock. That’s because funds are professionally managed and diversified, so the person who receives one doesn’t have to follow it closely. Also, dividends can be reinvested easily--a feature not offered by all corporations that issue stock.
And you pay lower transaction costs when making a small investment in a mutual fund. Try buying $100 worth of common shares without incurring at least $25 or $30 in brokerage commissions, plus another $25 or $30 when you sell.
You can give a mutual fund to another adult, such as a friend or your spouse, but you need to obtain that person’s signature when completing the application. “Because the adult recipient must sign, your gift would lose the element of surprise,” Marans says.
The signature is needed for tax reasons--to verify that the person’s Social Security number is correct. But when giving a fund to your child or grandchild, this problem can be avoided because you can certify that child’s number.
There’s another good reason to give to a child. The younger the person, the more time his or her investment has to grow. Suppose you choose a fund that increases at an average rate of 9% annually after taxes. Ten years from now,, your gift of $250 would be worth about $592, provided the fund continues to appreciate by 9%. If the investment stayed put for 60 years, it would swell to $44,008, assuming the same growth rate.
Obviously, this can make a big impact not only on the kid’s pocketbook but also on the kid himself. “When you introduce the magic of compounding to a young child, there’s an educational factor involved,” says Gunnar Hughes, spokesman for the Twentieth Century Investors fund family in Kansas City, Mo.
The easiest way to hold assets in a child’s name is through a custodial account under the Uniform Transfers to Minors Act. There’s no extra paper work involved. All you have to do is designate this option when completing a standard mutual fund application. As custodian, you (or the adult you choose) will retain control over the investment until the child reaches the age of majority--18 in California.
On small accounts, income taxes usually will be levied at the child’s lower rate. If his assets generate less than $500 in unearned income a year, there might not be any tax liability.
Twentieth Century has a unique fund called Giftrust that allows nothing but gifts. In fact, you can’t open an account for yourself or your spouse, although you can give one to anyone else. Federal and state taxes are paid directly out of the account by Twentieth Century, which serves as trustee.
Twentieth Century requires each Giftrust account to remain in place for a minimum of 10 years. A child can’t touch the money until he reaches the age of majority, and even adult recipients can’t get to it if the donor specifies a lengthier time frame.
“The fund is popular with grandparents because it allows them to be remembered for a long time, even after they pass away,” says Hughes, who adds that Giftrust accounts are most commonly opened for newborn babies. “We also see a lot of interest around the holidays.”
Unlike a custodian account, this fund is offered as an irrevocable trust that can’t be changed or canceled by the donor. However, that person may make additional investments from time to time--although the recipient can’t.
Because Giftrust’s portfolio managers can count on a stable asset base, without having to worry about sudden redemptions, they tend to buy long-term stakes in smaller growth stocks. Since recipients can’t redeem for a minimum of 10 years, they’re forced to stay invested through thick and thin--an advantage during a long-term market up-trend.
Giftrust ($250 minimum, no load, 800-345-2021) is a volatile performer, having dropped 14% in 1984 and 24% during the first 10 months of this year. On the other hand, it surged 55% in 1985 and 50% in ’89. “It’s our most aggressive fund,” Hughes says.
If you want to give a mutual fund and have an account statement in hand by Christmas Eve, call the fund company and request an application no later than early December, because the process generally takes a week or two, depending on mail delivery. (You can reduce the time involved by buying through a broker or financial planner.) Jewish investors will have to move a bit faster, considering that Hanukkah starts Dec. 12.
Assuming you decide to give a mutual fund to a child, keep in mind that he or she might be a bit disappointed initially. But unlike presents that break, wear out or become obsolete, this one will probably grow more valuable over the years. As it does and as the child matures, your gift will be increasingly appreciated.
LOW-MINIMUM MARVELS
Of the couple of dozen stock-oriented mutual funds that accept investments of $100 or less, the following have some of the best long-term track records. These funds also have low subsequent minimums, a feature that makes it easy to keep adding money to your account if you choose.
1-Year 5-Year Fund (Type)/Phone Minimum Sales Fee Return Return Income (EI) $100 8.5% -2% +255% (800) 231-4639 Franklin Growth (G) $100 4%* -7% +271% (800) 342-5236 Franklin Rising Dividends (GI) $100 4%* -11% -- (800) 342-5236 Pioneer II (GI) $50 8.5% -17% +235% (800) 225-6292 Provident Mutual Investment (G) None 6%* -23% +207% (800) 441-9490 Provident Mutual Total Return (B) None 6%* -14% +189% (800) 441-9490 Sovereign Investors (GI) $30 5%* -1% +271% (215) 254-0703 Twentieth Century Select (G) None None -5% +347% (800) 345-2021 EQUITY FUNDS AVERAGE -13% +187%
Notes: B = balanced; EI = equity income; G = growth; GI = growth and income. Performance results, for periods ending Sept. 30, 1990, provided by Morningstar Inc., Chicago.
* 12b-1 fee may apply
