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What mutual funds are geared toward teaching kids about investing?

QUESTION: What mutual funds are geared toward teaching kids about investing?

ANSWER: Only a handful of mutual funds are targeted at kids, and, quite frankly, the performance of these funds lately has been far from spectacular. Nevertheless, teaching children the merits of investing is certainly an important goal, particularly since it's a topic that isn't adequately covered in most schools. When more than 4,000 12th graders were recently given a test on personal-finance basics, the average score was an F, according to a survey by the JumpStart Coalition for Personal Financial Literacy.

Right now two funds are available that are specifically marketed to kids: the Stein Roe Young Investor fund (SRYIX) (click here for a profile) and the USAA First Start Growth fund (UFSGX). Both of these funds send out educational materials geared toward young investors and hold at least some stocks of companies that children ought to be familiar with, like Mattel (MAT). Unfortunately, both of these growth-oriented funds have suffered more than their average peer over the past few years, in part because they were caught holding technology names.

An alternative program for budding investors is offered through Monetta Funds. This small family, which offers seven funds (including stock, bond and money-market funds), doesn't gear its investments to kid-friendly names, but instead offers a reward system (in addition to educational materials) for kids as they make contributions to their Monetta portfolio. Currently the rewards come in the form of plush train cars. The goal is that the child must contribute $5,000 over time (thus learning the merits of dollar-cost-averaging) to eventually receive the entire eight-car set. The fund family soon plans to launch a significantly more elaborate rewards system with fancier gifts, says Bob Bacarella, president and portfolio manager of Monetta Funds.

Nevertheless, this fund family -- which has a penchant for growth stocks -- has also struggled in this bearish environment, and some of its funds lag their peers in their respective category. Nevertheless, with a $250 initial investment requirement (or $50 should you choose automatic investments of $25 every three months), this could be a relatively easy way to get a child started off investing. (For more on Monetta's program, visit the Web site.) Alternatively, you could consider simply investing in any mutual fund that has a low minimum investment, although, keep in mind, they don't provide educational materials.

Another option is to invest directly in a company, rather than a mutual fund. By participating in a dividend reinvestment plan (DRIP) or a direct stock purchase plan (DSP), you could set up an account for a child and with relatively little money begin purchasing shares of, say, McDonald's (MCD), Coca-Cola (KO), Sony (SNE) or Nike (NKE). Like a mutual fund, DRIPs and DSPs let you own partial shares, and minimum initial investments tend to be $1,000 or less. Some companies (albeit ones that might not be terribly exciting to kids) even allow investors to get started with a mere $100. For a list of participating companies, visit Netstock Direct. Once you and your young investor have pinpointed a company to invest in, you can either open an account with the company itself, or open an account through Sharebuilder.com (which is owned by Netstock Direct), which will charge $4 per transaction.

Keep in mind, an adult must set up a custodial account on a child's behalf, with the child gaining control of the account once he or she reaches the required age. You should also know that young Alex P. Keaton types will be subject to the cruel kiddie tax -- thus giving them an early introduction to Uncle Sam.

Finally, even if you don't open up an account, there are lots of opportunities for parents (or grandparents or any adult for that matter) to teach children about investing. For starters, any decent-sized bookstore will have books for both parents and kids on this subject. But perhaps more important, "money shouldn't be one of those hush-hush topics," says certified financial planner Susan Bradley of West Palm Beach, Fla., who runs "money camps" to teach kids about saving and investing. In other words, conversations on investing for your child's college education, allocating your 401(k) or just saving for a short-term goal like a trip to Disney Land shouldn't always be held after the kids have gone to bed.