Topnotch All-in-One Mutual Funds for College Savers

Although 529 plans provide a tax-friendly way to save for college, investors in these plans do give up some flexibility. For instance, if you invest in a 529, you'll have to choose from a preset menu of investment options. And unless you use 529 proceeds for qualified college-related expenses, you'll owe taxes and a 10% penalty on your withdrawal amount. That can be a big drawback for investors who would like to multitask, saving for college while also stashing money away for retirement or near-term goals.

For those who choose to save for college outside of a dedicated college-savings vehicle such as a 529 plan, a conventional mutual fund can be a solid, no-nonsense option. For one, you are dealing with a more straightforward and transparent investment vehicle. And while you'll forgo the tax benefits associated with a 529, you'll have the flexibility to tap your assets for other reasons if needed. (Multitaskers can also preserve at least some tax benefits by saving within the confines of a Roth IRA, where you can withdraw your contributions at any time and for any reason without owing taxes or penalties. You can also avoid paying a penalty on the investment-earnings component of a Roth, provided you use the money to pay for qualified higher-education expenses.)

Depending on your child's age and how much you anticipate needing for college, a conservative- or moderate-allocation offering may provide a solid anchor in a college-savings portfolio. These funds come in a range of allocations. Conservative-allocation funds typically hold 20%-50% of assets in equities and 50%-80% of assets divided between fixed income and cash; such options make sense if you're saving for a student who's 10 years of age or older. Meanwhile, moderate-allocation funds tend to hold larger positions in stocks, with typically about 50%-70% of assets in equities and the remainder in fixed income and cash. Such vehicles work well when saving for young children. (Just be sure to transition your child's assets to a truly conservative vehicle, such as a bond fund, once your child hits his or her midteens, as discussed in this article.

Using our  Premium Fund Screener, we searched for worthwhile funds in both categories. On the fees front, we eliminated load funds and required that expense ratios be less than the category average. We required that managers have helmed the fund for more than five years. And to make sure that they had earned their stripes through both thick and thin, we gave these funds a stress-test for performance by layering on several screens that would yield funds that have ranked in the top third of their peer groups for the trailing three-, five-, and 10-year periods. Finally, by adding a criterion for distinct portfolios, we were left with only a single share class for each fund. Premium members can run this screen by  clicking here.

Below, we've highlighted three of the offerings the screener revealed.

 Mairs & Power Balanced Inv (MAPOX)
Expenses: 0.83% | Minimum Investment: $2,500
Bill Frels is an experienced manager who invests with conviction. This moderate-allocation fund is quite concentrated with only about 40 to 50 stocks making up around 60% to 65% of the portfolio. Meanwhile, Frels keeps the fixed-income sleeve invested in government-agency bonds and short-term corporates. And while this fund may court some equity risk, its sound buy-and-hold strategy makes it a worthy core holding for a college-savings portfolio.

 Vanguard LifeStrategy Income Inv (VASIX)
Expenses: 0.23% | Minimum Investment: $3,000
This conservative-allocation fund of funds boasts very low expenses, and despite its cautious approach, it has delivered solid long-term returns. Morningstar fund analyst Bill Rocco notes that some adjustments to the composition of this fund of funds are under way, including a slightly larger bond stake and a new 6% position in  Vanguard Total International Stock Market (VGTSX). Those changes shouldn't alter the fund's appeal as a no-nonsense, low-cost option for conservative investors.

 T. Rowe Price Personal Strategy Balanced (TRPBX)
Expenses: 0.68% | Minimum Investment: $2,500
As a core holding in a portfolio, this moderate-allocation fund of funds provides a one-stop shop for diversification and is led by a talented team of managers to boot. The stock sleeve, which encompasses just more than 62% of the portfolio, provides exposure to large-growth, large-value, small-cap, and international components. And the fund's bond stake, at nearly 33% of the portfolio, includes domestic investment-grade, high-yield, and occasionally international bonds. Due to a fairly stable asset allocation and careful selection of the funds held in the portfolio (many of which have been Morningstar Analyst favorites), patient shareholders have reaped plenty of rewards over the long term.