What Is the Minimum Amount For Investing in a Mutual Fund?

Some mutual funds let investors buy in with no minimum at all—meaning that even $5, $10, or $100 can get you invested. Although there are mutual funds with no minimums, most retail mutual funds do require a minimum initial investment of between $500 to $5,000, with institutional class funds and hedge funds requiring minimums of at least $100,000 or more.

Key Takeaways

• Many mutual funds require minimum investments in order to participate, ensuring sufficient capitalization and covering of the fund’s operating costs.
• These minimums can typically range from $500–$5,000 for investors, but they may be significantly larger for institutional investor class funds.
• That said, several mutual funds do now offer $0 minimums.

What Is a Minimum Investment?

A minimum investment is the smallest dollar or share quantity that an investor can purchase when investing in a specific security, fund, or opportunity. Often, mutual funds will require a minimum amount in order to ensure they have enough assets under management (AUM) to achieve their investment goals and cover overhead. This means an investor cannot invest or buy any amount they want; they need to invest or buy at least the minimum amount required. Some funds prefer to cater to smaller clients, with low minimum investment products, while other firms prefer higher minimum investments that are geared toward higher net worth individuals.

For beginning investors, this amount can be difficult to reach and often means their entire account balance is invested in just one fund. These minimum amounts are set by each fund as a means to keep small, short-term trades from affecting cash flows and the fund’s daily management. Each fund’s minimum is dictated by the style of the fund and its investment objective. However, there are some funds with lower minimums that make mutual fund investing accessible to all investors.

Examples of a Minimum Investment

For newer investors, funds with low or no minimum investment can be found from many providers. For example, the Charles Schwab Corporation (SCHW) offers a broad market index fund and a slew of target-date funds, each with no minimum initial purchase. Investors with the ability to invest at least $250 have access to many more funds from many different companies. For example, American Funds offers several solid funds across many different sectors and investment styles, all at this price point. All Dodge & Cox mutual funds require a minimum of $2,500, while many Vanguard mutual funds need $3,000 to get started. Meanwhile, Fidelity offers several mutual funds that have $0 minimums.

A mutual fund’s minimum also varies depending on the type of account. Some companies and funds have lower initial purchase amounts for IRA accounts. For example, the T. Rowe Price New Era Fund (PRNEX) requires a $2,500 minimum initial purchase for its mutual funds held in non-retirement accounts but only $1,000 for retirement accounts like IRAs. 529 College savings plans and Uniform Transfers to Minors Act (UTMA) accounts also usually have much lower fund minimums, and some fund companies even allow the minimum to be met through systematic purchases as low as $25 per month.

Advisor Insight

Rebecca Dawson
Dawson Capital, President, Los Angeles, CA

Mutual funds are either closed-end or open-end funds. Closed-end funds issue a set number of shares to the public through an initial public offering (IPO). These shares trade on the open market via market supply and demand. Therefore, they are not subject to minimum investment amounts; the price is reflected by the market and you can buy as many units as you can afford.

Open-end funds do not issue a set number of shares and are “open” to new investments, and shares are created or written off as necessary. These funds do enforce a minimum investment, which typically ranges between $1,000–$5,000. The minimum may be substantially lowered or waived altogether if the investment is made in a retirement account or if the investor agrees to automatic, reoccurring investments.

Read the original article on Investopedia.