How to Avoid a Mutual Fund’s Minimum Investment

by Rob Berger

in Investing

Here’s a tip I picked up from Matt Krantz of USA Today. Most mutual funds require a minimum initial investment. Even most Vanguard funds have a $3,000 minimum. When I started investing a long time ago, you could bypass the minimum investment requirement by agreeing to an automatic investment plan. Today, this option is often not available. So if you want to invest in a fund, but don’t have enough money to meet the initial investment requirement, turn to an online discount broker instead.

With discount brokers such as Zecco, TradeKing, or ShareBuilder, you can invest in an Exchange Traded Fund (ETF) for about $5 a trade. For example, rather than buying Vanguard’s S&P 500 fund (VFINX), an investor could purchase shares of Vanguard’s Large Cap ETF (VV). And while you do have to pay a few dollars for each trade, the cost is no more than an expensive cup of coffee at Starbucks, and the expense ratios of ETFs are generally lower than the cost of the mutual fund counterparts.

This past week has seen a number of great blog carnivals and articles. Here are several worth reading:

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Rob Berger

Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.
Rob Berger
Published or updated March 30, 2012.

{ 5 comments… read them below or add one }

Half Assed Housewife May 30, 2009 at 8:19 pm

Thank you so much for showing people a way around the required minimums. It is so disheartening when you want to invest, but don’t feel as though you are rich enough to do so. Even billionaires have to start somewhere.

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Manshu June 3, 2009 at 6:29 am

Thanks for linking back to the OneMint carnival :)

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Mack jackson July 10, 2009 at 2:23 am

Thanks for sharing such great post, it will help many investors to get info about mutual fund investment.

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Moss December 16, 2009 at 11:12 pm

I’m sure it goes without saying, but… you do know that you are suggesting exchange traded funds are the same as a mutual fund. They are not. It also seems that — even with a low commission from a discount broker online — the total expense to use this method of accumulation rules out a prudent choice.

Don’t get me wrong – I understand the need for higher minimums. But grabbing $100 worth of an index tracking ETF 30 times will cost > 150 bones. $150 / $3000 (the Vanguard minimum) totals a cost to buy expressed as… … 5 percent!

People need to realize that there are two costs involved:

1) Cost to buy
2) Cost to own

I think Mr. Krantz overlooks (or at least doesn’t account for) this.

Now, I espouse the use of ETF’s, mutual funds and individual securities, and the economies of scale apply, yet we cannot be penny wise and pound foolish.

Accumulate the minimum in an interest bearing savings account and pass on the coffee. In the end, the interest earned will (may?) treat a couple to a fine evening out. At least the commission savings will, and THAT is not a bad investment.

Moss
NASD Series 7 and 24
SEC Series 65

Reply

DR December 17, 2009 at 6:39 am

Moss, the point is that mutual funds and exchange traded funds ARE different. Agreed that you pay a cost to buy and sell ETFs that you won’t pay with no load funds. But if you are a long term investor, the ETFs can be better in the long run because of the reduced expense ratio as compared to comparable mutual funds.

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