ASK KIM
Three Starter Mutual Funds
by Kimberly Lankford

My best friend's little sister just graduated from college. She is just starting out in the working world and trying to get on her feet. It will be a while before she has a chunk of "extra" money to invest. I would like to help her set up an IRA. Once an account is set up, it is a lot easier to get in the habit of putting money in it. I should know. I procrastinated for several years. Any suggestions on how to set up an IRA with a minimal initial deposit?

What a great idea! Little Sister will have to set up the account herself. But you could provide a great head start by recommending a few good funds with low investment minimums, help her with the paperwork and even give her some cash for the initial investment.

Most funds have an initial investment minimum of at least $1,000, but a few let you in with less. Selected American Shares (SLASX), which invests in large undervalued companies (owning many financial stocks right now), only requires $250 to open up an IRA. Homestead Value (HOVLX), which invests in beaten-up shares of large and medium-sized companies, only requires $200 for IRAs.

If you want a fund that also invests in small companies and foreign firms, as well as large companies, and implements a variety of investment strategies, consider T. Rowe Price Spectrum Growth (PRSGX), a fund of funds investing in ten other T. Rowe Price stock funds. It's an easy way to have a diversified long-term portfolio without worrying about meeting the minimum investment requirements of several funds. The fund charges no fees of its own, but just passes on the expenses and fees of the funds it invests in, which never total more than 1% per year.

You generally need $1,000 to open an IRA with Spectrum Growth, but if your generosity doesn't extend that far, Little Sister could get in with as little as $50 per month if she makes automatic transfers from her bank account -- a great way to start small and keep going.

Since she's in her first job, she'll probably qualify to invest in a Roth IRA, which can be very valuable in the long run. She can access the contributions at any time and withdraw the earnings tax-free after age 59½ (you must earn less than $110,000 to qualify if single; $160,000 if married). She can only invest the lesser of $3,000 per year, or the amount of her earned income.

If she invests that much each year, the results could be huge by the time she retires. If she's 25 now and invests $3,000 per year in an IRA, she could amass a nest egg of about $840,000 by the time she's 65, if the returns average 8% per year. A very impressive outcome from investing just $250 per month.

As her account balance grows, she could expand her investments into our long-term portfolio, which is a good way to diversify among several types of funds. Since the money is in an IRA, she can move it around without a tax bill, making it easy to adjust the investments through time.

Also encourage her to invest first in a 401(k) if her employer offers one, at least up to the employer match. That's free money she'll have a tough time finding anywhere else. And the money comes out of her paycheck before taxes are applied, making it an even bigger savings bargain.