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Are mutual funds good investments for someone who wants to invest a small amount of money?

November 28, 2008, 10:14 am
Investments
Adam asked:


I plan on putting a little bit every month into this account. I don’t have a lot to put in it but I want to invest some.
Yes, when I say small amount, I am saying I want to invest about $100 a month or so.

Sue:

ETF index funds, like the Spider (SPDR), are probably your best bet. Actively managed mutual funds or even index tracking mutual funds charge higher management fees which will eat more out of your returns especially if you only have a small amount to invest to begin with. ETFs are Exchange Traded Funds that trade openly on the market so you know the value of your investment at the end of the day and provides the ability to short the shares. You would open a brokerage account (easily done at ING or eTrade etc) and just buy shares through that.

***Cliff, I completely disagree with you. Brokerage fees are minimal while minimums for good mutual funds hover at around $50,000 just to get in the door. When this asker says small amount, I am imagining in the hundreds. Unless this is a 401k or IRA, he/she will have a hard time finding a mutual fund that will provide good returns as well as have a low enough account minimum.

**Wasn’t aware there was an asset builder type of program available, I’m pretty sure it’s not very common. Ok so granted, with that particular program that does make a big difference. However, I’d say beware of the fine print. There’s probably something like a nuisance fee and what if you are unable to contribute for a month? How much will they charge you? Even more important, what if you need cash fast and want to liquidate? How much are you charged then? There are tons of factors to consider and a lot of reasons why some people prefer ETFs (like me) and some, mutual funds (like, apparently, Cliff).

November 28, 2008, 11:00 pm

  • Cliff:

    They do have automatic investment options that you basically subscribe to an auto-pay for that fund. Look into that if you wish to do say $50 a month into the fund (or what ever their minimum is).

    ETF’s and SPDR’s are not a good option just because you are putting small amounts and each time you do that, you will have to pay a commission fee (depending on your broker could be $5-$20 each time you add more money).

    EDIT:
    **Sue: not sure where you saw good mutual funds of $50,000. There are TONS of great ones that start at $2,500. But that aside many investment companies allow you to use Automatic Asset Builder to get around the initial deposit.
    “What I like about this automatic investment idea is that it lets me start investing even when I have only a small amount of money. Instead of having to save $3,000 or $2,000 to come up with the initial fund, I can start with as little as $50 a month”.

    T. Rowe Prices’ website says:
    “The Automatic Asset Builder (AAB) service enables you to systematically invest money from your bank account on the same day each month. For example, you may invest a minimum of $50 into a fund account each month from your bank account.

    The minimum initial investment requirement to open an account (which would normally be $2,500) is WAIVED if you choose to fund the account by Electronic Funds Transfer (EFT) with Automatic Asset Builder (AAB) service.”

    If you do that same $50 through an ETF (Exchange Traded Fund) or SPDR it would cost you (with Scottrade for example) $7 each month and might not be enough to be one share, depending on the fund’s NAV.

    November 30, 2008, 8:47 am

  • src50:

    Yes, for long-term investing. Open an account directly with a good no-load company like Vanguard or T. Rowe Price.

    ETFs are not good for periodic investing because you generally have to pay a brokerage fee with each purchase.

    December 1, 2008, 11:23 pm

  • mylilbubbers:

    It really depends… are you getting a match from a company or are you investing on your own? There are definitely better avenues than mutual funds, however, they are much more complex to understand. Just try and stick with no loan funds (very low management costs that eat away your profits)Calculate your risk tolerance and retirement needs, then figure out what best suits you from there.

    December 2, 2008, 12:23 am