Minimum investment refers to the minimum amount of money or shares an investor could purchase for investing in particular security such as a fund or opportunity. Most mutual funds require a minimum investment to ensure sufficient AUM to meet their investment objectives and pay costs. This means that investors cannot purchase or invest in whatever amount they like but must either invest or buy the minimum amount needed. Certain funds are more suited to the smaller market by offering the lowest minimum investment requirements, while others prefer investments with higher minimums designed for people with higher net worth.

For new investors, the amount could be difficult to attain; usually, the entire account balance is held in one fund. The fund's manager determines the minimum amounts to prevent tiny, short-term transactions from impacting cash flow and managing the fund's day-to-day operations. The minimum amount for each fund is determined by the design of the fund and its investment goals. However, funds with lower minimums permit mutual fund investing to investors of all levels.

How a Minimum Investment Works

Minimum investment amounts may differ according to the fund of mutual interest and range between $1.00 to $1,000,000 or greater. The minimum investment for hedge funds could be higher in some cases, and this is also the case for LPs and unit trusts. Retail investors have various funds with low minimum investment requirements, beginning at $100 or more.

The most important factor that a fund manager must consider when determining a minimum size for investment can be determined by the fund's strategy as well as the liquidity requirements of the fund. If they set a minimum amount of investment, fund managers can effectively eliminate investors with short-term goals and control cash flows to the fund. This can help in managing the day-to-day operations of the fund's assets.

Funds could also set the minimum investment requirement to reduce the documentation and bookkeeping associated with having many clients. A fund might have few large clients, whereas another firm could have a similar size of its capital management, but thousands of customers provided the capital.

Some companies prefer catering to clients with smaller budgets, offering minimal investment requirements and some firms prefer more minimal investments targeted at people with higher net worth. Some funds require minimum investment levels, which differ depending on the trading platform due to a contract between the broker-dealer and fund firm.

Examples

Kiplinger suggests a few funds with smaller minimum purchase requirements. The SCHW offers a broad index fund and a variety of targeted-date funds, each having no minimum purchase requirement. Investors who can make a minimum investment of $250 will access numerous other funds from various companies. For instance, American Funds offers several excellent funds in various areas and investment styles, all at this cost. Every Dodge & Cox mutual fund needs a minimum of $2,500. Several Vanguard mutual funds require at least $3,000 to start. Additionally, Fidelity offers several mutual funds with no minimum requirements.

The minimum for mutual funds is dependent on the kind of account. Some firms have lower minimum purchase amounts in IRA accounts. For instance, T. Rowe Price (PRNEX) has an initial purchase of $2,500 of its funds that are held in non-retirement accounts, but just $1,000 is required for accounts in retirement, such as IRAs. Savings plans for college and Uniform Transfers to Minors Act (UTMA) accounts usually have lower minimum fund requirements. At the same time, some companies permit the minimum to be met by making regular purchases of as little as $25 per month.

Special Considerations

Typically, investors need to be aware of minimum allocations to invest in when considering new investment opportunities. In other markets, the minimum investment can be determined by a broker or simply by the price at which you purchase the securities (multiplied by the amount the security can be purchased or sold). For instance, some brokers require an initial investment of $5,000 to purchase corporate and Treasury bonds. If dealing with larger customers or companies, the minimum investment can be as low as $25,000, $100,000, or even $1 million or higher.

Many hedge and mutual fund funds use a specific strategy or follow an index. Many indexes are investable in the present by purchasing Exchange-traded Funds (ETFs). ETFs don't have the investment minimums required by most hedge and mutual funds, but they can provide similar returns in some instances. Because ETFs are similar to stocks, investors can purchase just one share. The minimum investment for the ETF equals one share multiplied by the price of trading that is the ETF.