Parents, here's an investment vehicle to get your young adult children off to a sound start building wealth.
Before I give you the name, here's a proviso. This investment can be maddeningly hard to set up. I was reminded of this by a recent e-mail from a reader who described her experience as a "comedy of errors" that took about two months to work through. The product we're talking about here is the e-series of index mutual funds from Toronto-Dominion Bank. Think your kids should jump right into exchange-traded funds? TD's e-series may actually make more sense for beginners.
Reason #1: They cost nothing to buy or sell, and you can start with as little as $100 for lump-sum investments or $25 for pre-authorized purchase plans. ETFs can be purchased at some online brokers for little or nothing, but most charge at least $10 per purchase.
Reason #2: These funds are very cheap to own – much cheaper than other mutual funds, and even some ETFs. There are e-series funds covering the bond market, plus Canadian, U.S. and international stocks, and the management expense ratios range from 0.33 per cent to 0.53 per cent.
Can your kids afford to invest $200 per month? With e-series funds, they could put $40 in the Canadian bond e-series fund and $53 into each of the Canadian, U.S. and international index funds. Doing this monthly would provide a great start for long-term investing, which means a timeframe of 10 years plus. For shorter-term financial objectives like saving for a home down payment, a much more conservative approach is required.
TD's web page for e-series funds suggests you can get started as a customer by visiting a bank branch, but don't bother. Instead, suggest your kids open an account at the bank's online brokerage, TD Direct Investing, and then place an online order for e-series funds (they're not available at other firms). TFSA accounts make the most sense for young investors – for reasons of practicality and low cost. Brokers may charge admin fees on small accounts, but they usually don't for TFSAs.
That reader's problems with e-series began with an attempt to enlist the help of branch staff in transferring a mutual fund account from another firm into e-series funds. Paperwork was reportedly lost, and many follow-up phone calls were required. So you've been warned. The e-series lineup is ideal as in introduction to investing, but sign-up process can be a pain. Call it short-term pain for long-term gain.
Rob Carrick