Making Your Initial Mutual Fund Investment

Making Your Initial Mutual Fund Investment

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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.

4 Responses to “Making Your Initial Mutual Fund Investment”

  1. Anonymous

    It seems to me that there’s WAY too little information here to make a good recommendation. Are the funds equivalent in other ways? For example, are we talking about the difference between a Vanguard Total Stock Market Index Investor Shares Fund and a Vanguard Total Stock Market Index Admiral Shares Fund? Or are we talking about the difference between a Target Retirement fund and a REIT fund?

    I’m with Robert on fees, loads and commissions. Also, if looking for ETFs, are the trading fees high, or are they free as in buying Vanguard ETFs through the Vanguard Brokerage Service?

    More information please…

  2. Anonymous

    I’m concerned that these actively-managed funds have high fees/loads/commissions. This is a more important question: How efficient are these investments? Are more than 1% of Mark’s investments going to be eaten up by high turnover and annually by high management fees? Will 5% of his initial investment be consumed by a load? In reality, Mark may be better off with passively-managed ETF index funds, which have a far, far lower threshold.

  3. Anonymous

    Normally the ‘minimum investment amount’ is used as a criteria to filter the universe of funds down to a smaller set.

    I think Mark is going about this backwards. He’s already decided on the two candidates, and now he is asking about the minimums.

    How do the fees compare between the two funds? Sales loads? If the truth is that the ONLY thing different between the two funds is the minimum amount: then go with the lesser amount, and save some of your cash to put into a different fund.

    No point in straining the budget to go ‘all-in’ on a single mutual fund (or single fund family for that matter).

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