Parents—or grandparents—looking to give a child a boost with an investment sometimes get tripped up by the minimum initial investment required by some mutual fund companies. If you have just $500 to start an account, it may seem like every company wants $2,500 or more at the outset. One solution to this common problem is to look a little deeper at the company’s offerings. If you already have a fund in mind, check out the possibility of opening a custodial account. Many funds require less in a custodial account set up for a minor, and some require as little as $25 if you agree to make monthly or quarterly investments of a minimum size, using money automatically drawn from your bank account. Remember that a custodial account, though controlled by you or another adult, belongs to the child, who will be free to withdraw the money upon turning 18 or 21, depending on the state.
Another alternative is to go to the Web site of the fund-data firm Morningstar Inc. and use the search tool to locate funds with initial investment minimums of $500 or less. Go to http://screen.morningstar.com/FundSelector.html. Under the Set Criteria tab, go to the drop-down menu called “Minimum initial purchase less than or equal to,” and click on $500. Then click the Show Results tab to get a list of 200 funds. Pay attention to each fund’s expense ratio, or cost of fees as a percentage of the share price. Funds with low initial investments often charge relatively large fees to cover their costs of maintaining small accounts.
Also, take a look at an outfit called ShareBuilder, which has no minimum investment for opening regular and custodial accounts. ShareBuilder commissions start as low as $4 a trade for stock purchases. ShareBuilder is designed for people who want to make regular weekly or monthly investments. Investors’ orders are pooled and purchases and sales are made in blocks every week. Hence, prices can shift between the time you issue your order and the date it is filled.