Your Money : Meeting the Minimum Fund Requirements

There’s good news and bad news for people who want to start investing in mutual funds but don’t have a lot of money to do it.

The bad news is that mutual fund companies are increasingly raising their minimum investment requirements, often turning away anyone with less than $2,500 to put into a fund. The good news is that these minimums are frequently being waived for anyone willing to invest a relatively small amount--often $25 or $50--each and every month, generally by an automatic transfer from his or her checking account. “It’s evident to us that an increasing number of fund companies are opting for a trade-off,” says John Collins, a spokesman for the Investment Co. Institute, the mutual fund industry’s main trade group. “They’ll waive or reduce minimum investment requirements if you’re willing to have an automatic debit from your bank account.”

Why do fund companies impose minimum investment requirements in the first place? Because no-load mutual funds earn profits on just one thing: management fees that are calculated as a percentage of your account value. On small accounts, the management fees don’t come close to covering the cost of sending out monthly investment statements, annual reports and answering investor questions over the phone, says Louis Harvey, president of Dalbar Publishing in Boston.

“The average management fee is 0.65% of assets,” Harvey says. “On a $100 account, you make 65 cents for the year.” When there were no required minimum investments, investors often opened tiny accounts that stayed tiny--and unprofitable--for years, Harvey says.

In addition, mutual fund surveys found that the smallest accounts required the lion’s share of customer service, says Don Phillips, publisher of Morningstar Mutual Funds in Chicago. “No-minimum programs were costing mutual fund companies a lot,” he says.

It’s not surprising that minimum investment requirements are now standard in the industry, Harvey says.

However, the offer to waive these requirements for investors who set up automatic investment programs is an equally strong trend. Investors are required to maintain the monthly program only until they reach the minimum level, but most fund companies find that their customers participate in the automatic programs far longer than required.

Indeed, once they get familiar with the programs, investors often increase their monthly contributions or add to their mutual fund accounts by transferring in money that had been in bank accounts or other investments, Harvey says. That has helped spur growth at some of the fund companies that court this business most aggressively, he adds. Twentieth Century and Janus Funds are among the mutual fund companies crediting these kinds of changes for some of their recent asset growth.

The programs can also prove hugely beneficial to investors, Phillips says--particularly now when stock values seem high and many funds are coming off a tremendously good year.

“If you are just getting into the market, this is probably the best way to do it,” Phillips says. “Even if you put your $50 in this month and the market was cut in half, you’ve only lost $25. That’s not going to break you.”

Dollar cost averaging--which is what you’re doing when you invest small amounts regularly--protects you from ill effects of temporary market swings. You invest the same amount every month. When the market is up, that investment buys fewer shares; when it’s down, your investment buys more. As long as the market rises over the long haul, you’re a winner.

“What happens to a lot of people is they spend their time pacing the sidelines, waiting for the perfect moment to enter the game,” Phillips adds. “But the time you enter is not that important as long as you get in in a way that’s sustainable.”