Topnotch Funds for Gift-Givers

With the holidays just around the corner, many of you have found that your gift-shopping deadlines have come and gone. If the prospect of looking for a parking spot and waiting in line at stores knocks the holiday cheer right out of you, we invite you to think outside of the box (and the mall). While you can't go wrong with the standby gift of money, your appreciative recipient is most likely to spend the money immediately. Investments, on the other hand, allow your initial gift to grow even larger over time, so they can be a compelling way to contribute to a loved one's nest egg.

The Logistics
Note that if you're gifting to a young person, UGMA/UTMA custodial accounts provide a way to save on behalf of a minor child without hiring an attorney to set up a trust fund. Donors must appoint themselves or another adult as custodian to look after the account. Depending on state laws, a minor can obtain access to the account when he or she reaches the age of majority--usually either 18 or 21.

Investors should note that in 2010, you can give up to $13,000 in gifts to as many people as you want without being subject to the gift tax. (Recipients will never owe any taxes on the initial gift they receive, though they will be subject to applicable taxes on future appreciation in their holdings.) Likewise, your spouse and you can jointly give up to $26,000 per person per year to as many people as you want. For additional information on the gift tax, click here.

Choosing the Investment Vehicle
If your gift recipient is a young person, a recognizable individual stock may be appropriate, like  Microsoft  (MSFT) for the techie or  PepsiCo (PEP), whose portfolio includes megabrands such as Gatorade and Doritos. Both companies currently have a Morningstar Rating for stocks of 4 stars. To see a list of all of our four- or five-star stocks, check out our  Premium Stock Screener.

On the other hand, if you're seeking an investment vehicle that provides one-stop diversification, an exchange-traded fund or mutual fund may be a more practical choice. Vanguard, Fidelity, Schwab, and TD Ameritrade brokerage platforms provide commission-free trades on ETFs, but note that providers vary on both the number of allowable trades and the funds that are offered commission-free.

Seeking Out the Best Giftable Funds
For traditional mutual funds that could serve as dependable and low-maintenance gift options for investors of all ages, we turned to Morningstar's  Premium Fund Screener. Our aim was to identify some topnotch domestic- and foreign-stock funds with minimum investment requirements of $1,000 or less. First, we homed in on funds that our analysts designated as suitable core holdings. To focus on high-quality funds helmed by experienced managers, we sought funds with Morningstar Ratings of 3 stars or higher whose managers have been on the job for at least five years. We added an additional screen for no-load offerings, to keep a damper on fees for future contributions to the fund, and sought offerings with expense ratios below the category average. Finally, to help facilitate further research on each fund, we called up the distinct portfolio of offerings with Analyst Reports available. Premium members can run the screen by  clicking here.

The screen brought up a list of 22 funds that could serve as potential gifts and cater to a range of individuals. Of those, we've highlighted three standout funds below.

 Schwab Total Stock Market Index (SWTSX)
Minimum Investment: $100 | Expense Ratio: 0.21%
This index fund's rock-bottom price tag and investment minimum make it an attractive option from the get-go, but it boasts other attractive qualities. It tracks the Dow Jones U.S. Total Stock Market Index, which provides exposure not only to mega-cap names but also to some small- and mid-cap stocks. This strategy provides increased diversification and has also given the fund a long-term performance a boost over its sibling,  Schwab S&P 500 Index (SWPPX); currently, the fund sits comfortably in the large-blend category's top quartile. All in all, this fund is a solid choice for the newbie or seasoned investor looking for a straightforward, low-risk core offering. (Note that total-market ETFs such as Vanguard Total Stock Market ETF  (VTI) would also serve as worthwhile alternatives.)

 FAM Value (FAMVX)
Minimum Investment: $500 | Expense Ratio: 1.26%
Managers Thomas Putnam and John Fox focus exclusively on fundamentally sound firms with strong cash flows and good returns on capital. Their measured approach to investing will cause the fund to lag its more aggressive peers at times, but their low-risk-strategy has generated an excellent long-term record. The managers tend to stick with their high-quality, high-conviction picks, as evidenced by their low turnover rates, which translates to a more tax-efficient fund. For the risk-averse investor who prioritizes dependable downside protection, this mid-cap blend offering is a worthy choice.

 Oakmark Global (OAKGX)
Minimum Investment: $1,000 | Expense Ratio: 1.15%
This world-stock Analyst Pick could serve as a worthy stocking stuffer for the globetrotter. Managers Clyde McGregor and Robert Taylor focus on what the herd is avoiding, investing in high-quality companies that are trading below their estimates of fair value as a result of temporary problems. As such, this fund is most appropriate for investors with long investing horizons. Not only do some of the managers' more controversial bets take time and patience to work out, but Oakmark Global's concentration in individual sectors and countries courts additional risk. That said, this is a fine core pick, particularly when paired alongside a growth offering in a portfolio.

Data as of Dec. 14, 2010.