Making Your Initial Mutual Fund Investment

388 309

A reader named Mark recently wrote in with an investing quandary… He’s identified two possible funds to serve as the basis of his long-term investing, and he’s wondering how to get started.

His top choice (let’s call it Fund #1) has a minimum investment of $10k, whereas his second choice (Fund #2) has a minimum investment of $3k. Here’s the problem:

I do not have enough capital to invest $10k in [Fund #1] right now. I do, however, have enough to start investing in [Fund #2].

My questions for you are:

Should I wait X months to save enough to invest in [Fund #1]? The downside of this is that I will not be investing for my retirement outside of my 401(k) for possibly as long as six months.

Or should I start investing in [Fund #2] until I have $10k invested, and then sell it to purchase [Fund #1]?

While I’m not in the business of providing advice for specific financial scenarios, I’m always happy to share my thoughts about the pitfalls and advantages of one general strategy vs. another.

In very general terms, I would say that prospective investors should first look for equivalent alternatives with a lower barrier to entry. For example, look to another fund family with lower minimums, or consider by an ETF equivalent.

In Mike’s case, he’s looking at a couple of well-respected, actively managed funds that are really only available from one mutual fund family, and which don’t have any comparable ETF alternatives. Assuming that he sticks with these two choices, he needs to define a strategy for getting started.

As he rightly pointed out, by waiting until he has enough saved to invest in Fund #1, he’ll be sitting on the sidelines for up to six months. This could be a good or bad thing. The long-term trend of the market is upward, so he could very well miss out on some gains by waiting.

Of course, it’s nearly impossible to predict the direction of the market over short time periods, and it’s quite possible that the market will dip while he’s waiting, thereby allowing him to buy in at better prices down the road.

As for holding Fund #2 while building up enough money to buy into Fund #1, the primary downsides are the extra bookkeeping and the likelihood that he’ll have to declare a small capital gain or loss on his tax return.

Ultimately, if it were me, I’d probably just keep things as simple as possible. In other words, if I really had my heart set on Fund #1, then I’d probably save like mad so I get over the $10k threshold as soon as possible. If, on the other hand, I liked Fund #2 nearly as much, I’d probably just stick with that one from the beginning.