Initial Investment

Most funds have a minimum initial investment requirement, often in the range of $2,000 to $3,000. For that initial investment, an investor can buy into the fund, becoming a shareholder. Thereafter, the investor gains or loses as the mutual fund gains or loses. The minimum investment for shareholders wishing to add to their account is typically relatively small, such as $250.

Insights

Throughout this discussion, remember that a mutual fund is simply an intermediary, passing on the income earned (interest, dividends , or both) as well as the capital gains and losses (both short term and long term ). In effect, the shareholders have hired professional managers on their behalf to take care of all decisions. The shareholders own the mutual fund, the mutual fund holds a portfolio of securities, and therefore the shareholders indirectly own the portfolio of securities.

The trend in the mutual fund industry has been to raise the minimum required to open an account. The argument is that the costs of servicing small accounts are too high to justify them. For example, American Century, a large mutual fund company, claims it needs about $10,000 in an account to break even on the servicing costs, which it estimates at about $80 annually. Even Vanguard, in many ways the low-cost leader in the industry, says it costs $45 to $55 a year to administer an account.

One after another, large mutual fund families that had low minimums have raised them. Even TIAA-CREF, known for its service to its clients , recently raised its minimum requirement from $250 to $1,500.

It is still possible to find a handful of funds that require $500 or less to open a regular account. Another handful have very low requirements for IRAs, and there is still a third group of a few funds that allow you to open an account with a small amount if you agree to an automatic-purchase program using a bank draft. ^[1]

^[1] This information is based on Joan Goldwasser, "Take Heart," Kiplinger's Personal Finance , April 2002, pp. 42 “45. Funds that accept smaller minimums are identified in the article.