Even if you don't have $5,000 or more lying around, you can still get in on the diversification offered by investing in a mutual fund. Some funds offer lower minimums, and you can structure your investments in other ways, by using an IRA in some cases or exchange traded funds to bypass many minimum requirements. When starting out this way, be aware of the pitfalls that often come with smaller accounts.
Regular Mutual Funds
While it is common for a mutual fund to have a minimum initial investment of $2,500 or more, some funds are available with low or no minimums. Often, these are money market mutual funds, which pay a low interest rate in exchange for safety and a very low risk of loss. Funds that allow no minimum investment are more likely to charge a maintenance fee for accounts with low balances, typically below $5,000. In exchange for a lower minimum, some funds will require automatic purchases through direct deduction from your checking account.
Exchange Traded Funds
Exchange traded funds are like mutual funds in the sense that they own baskets of stocks, bonds or other securities. Unlike mutual funds, ETFs are traded on the stock exchange just like individual stocks with prices that fluctuate throughout the trading day. You can purchase ETFs through a stockbroker or online brokerage firm, and the only minimum requirement is to purchase at least one share, at whatever the value of that share is, often less than $100.
Through an IRA
IRAs are designed to allow you to save for your eventual retirement over a long period of time. Many mutual fund companies lower initial investment requirements for an IRA, or even eliminate the minimum if you commit to regular automatic deposits through payroll deduction or electronic withdrawal from your checking account.
Fees and Costs
Mutual funds with lower minimum investments may have higher overall fees. With a regular mutual fund, lower minimum investments attract more investors, meaning that the fund incurs increased recordkeeping costs because it has more accounts to keep track of, more statements to mail and even the possibility of more customer service representatives. You will pay a commission on each transaction involving an ETF, either when you buy or sell. Even with an online brokerage that charges $10 per transaction, with investments involving the purchase of only a few shares, the transaction fee represents a sizable percentage of the total investment.
To avoid the higher potential fees of low or no-minimum investment mutual funds, consider saving money regularly in a bank savings account until you accumulate enough money to make the initial investment in your selected mutual fund. You will then have more investment options. Once you make the minimum investment, many funds allow lower additional investments, or you can continue depositing into the savings account until you know have enough money to make an additional investment.