How to Save for College

Mutual Funds

Mutual funds are a good way to invest in the stock market, because they provide diversification and professional management for much less money than you'd need to set up your own portfolio. To set up an individual portfolio, you typically would have to invest about $50,000, divided among ten or so stocks, to get the same amount of diversification a mutual fund provides. You'd also have to pay a commission of at least $50 each time you bought or sold shares, and an annual fee between $30 and $50.

Many mutual fund companies allow you to open an account for as little as $100. (Most funds charge an annual maintenance or management fee.) You'll need to accumulate between $1,000 and $2,500 in that account, depending on the mutual fund company you choose, before you'll be able to invest in a growth-oriented fund that will generate the high return needed to pay future college tuition. You may want to pick a growth fund that invests mostly in stocks, if your child is still a toddler. If you're investing for an older child, you may be better off with a less-risky balanced fund, which typically has the same minimum dollar requirements as a growth fund but invests in a mix of stocks, bonds, and cash equivalents.

Some funds charge a "load," a fee for investing, usually about 4.5 percent of the share price at the time of purchase. Although it sounds like a no-load fund will be a better use of your money, that's not always the case. Don't rule out a load fund simply because of this extra cost--it may have a better track record than a similar no-load fund you're considering when you compare the rates of return over several years. Pick the fund that has the best track record and best meets your investment objectives.

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