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Investment Minimums Aren't Minimal Anymore

March 29, 1998|RUSS WILES | Russ Wiles is a mutual fund columnist for The Times and co-author of "How Mutual Funds Work" (Simon & Schuster). He can be reached at russ.wiles@pni.com

Mutual funds have always enjoyed a reputation as populist investments, given their ability to deliver diversification and top-notch money management to people on a shoestring budget.

But if you look closely at the minimum investment amounts that most funds now require, you would find that the reputation isn't entirely deserved.

The lowdown on investment minimums is that they've been going up, making it harder for the most cash-strapped investors to get started with funds.

Morningstar Inc., the Chicago research group, searched its database and found only 10 no-commission stock funds still maintaining an open-door policy to investors with $250 or less. "More than 750 no-load funds make you pony up $10,000 or more," Morningstar said.

Rising minimums are nothing new. The trend toward higher entrance amounts has been in place for several years, mirroring the increased attention being paid to the ongoing expenses that all shareholders pay. That is, low-minimum funds sometimes are high-cost ones.

Items ranging from the printing and mailing of investor pamphlets to account record-keeping services are accorded more or less equally to all shareholders. But all shareholders don't pay the same amount in dollars for these benefits, since fees are collected on a percentage basis.

Thus, for a fund that charges 1% in yearly expenses, an investor with a $1,000 account balance would pay $10, whereas a person with a $100,000 balance would fork over $1,000. Such fees are deducted bit by bit, day by day, from a fund's net asset value. Investors who contribute less than they incur in operating costs are subsidized by other shareholders or by the fund company itself.

"Over time, having a large number of small shareholders isn't very cost-effective," said Sally Carleton, a spokeswoman for Berger Funds in Denver, which raised its minimums from $250 to $500 in 1996, then to $2,000 last year. "It costs the same to service any account, whether it has $500 in it or $50,000."

Boosting investment minimums isn't something that fund companies like to do or take lightly.

"I get plenty of warm, fuzzy letters from shareholders with low dollar amounts in their accounts," said Ronald Muhlenkamp of Muhlenkamp Fund ([800] 860-3863), a Pittsburgh-based fund with a good track record that requires just $200. "We want to develop long-term shareholders and so are willing to absorb some of the expenses."

But Muhlenkamp also wants to cut the fund's expense ratio from its current level of 1.4%--something that's not easily accomplished with a lot of small shareholders.

He cites one investor who last year opened 43 accounts with $200 apiece for his 43 grandchildren.

"It's a battle you run between minimizing your expense ratio and educating members of the public, some of whom don't have a lot of money," said Muhlenkamp, who is considering a plan to boost the minimum to $800 later this year.

Other no-load stock funds with low minimums include AARP Growth & Income ($500; [800] 322-2282), Century Shares ($500; [800] 321-1928) and Strong Total Return ($250; [800] 368-1030).

Another way some no-load companies address this problem is by offering automatic investment plans. In effect, these groups will let you skirt the minimum if you agree to have money pulled from your checking account on a regular basis--usually monthly--until the balance reaches the normal threshold.

Strong and Denver-based Invesco Funds ([800) 525-8085) will let you get started for $50, for example, and Neuberger & Berman ([800] 877-9700) of New York will open an automatic-investment account for $100.

Yet another way around dollar minimums is to invest through an individual retirement account. Fund companies that normally require $5,000 or $10,000 in taxable accounts can't request more than a $2,000 yearly IRA investment. Some groups may take less than $1,000 for IRAs.

Muhlenkamp, for instance, accepts IRA investments of any amount, although the fund doesn't plan to offer the new so-called education IRAs, which, according to federal law, can receive a maximum annual contribution of only $500.

Load funds have been more tolerant of small investors. The Putnam ([800] 225-1581) and United ([800] 366-5465) families, for instance, impose $500 minimums, and funds offered by Franklin Templeton ([800] 342-5236) require just $100. The Pioneer I and II portfolios ([800] 225-6292) go a step further, opening accounts for as little as $50.

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