Chances are, you've probably chipped in with friends at some point to make a purchase. It might have been a restaurant meal, a keg for your party or a shower gift for a mutual friend, but in each case sharing the cost made it painless for everybody involved. That's also one of the major advantages of investing in mutual funds. They have thousands of small investors, so your own contribution can be as low as $25 per month.
Mutual fund companies can be very different in their goals and policies, but most have a minimum investment. Sometimes this is stated as a lump sum, perhaps $500 or $1,000. However, some companies are willing to entertain smaller amounts invested in the form of regular payments. Your $25-per-month commitment becomes $300 over the course of a year, and, more importantly, adds to the fund's pool of predictable monthly income. From the fund company's perspective, it also allows them to build a relationship with you while you're new to the market. Over time, as your portfolio increases, you'll steadily grow more valuable to them.
Setting It Up
The first step in setting up your investment is finding funds with a $25 a month minimum. Searching on the Internet is one useful method. Check with your friends and family as well, to see if anyone you know has had experience with a low-investment fund. The banks you hold accounts and credit cards with might also offer funds with low minimum investments, and often appreciate the opportunity to attract more of your business. Once you've found a company to deal with, you'll need to set up an automatic monthly pre-approved payment through a bank account, credit card or debit card.
Choosing Your Fund
The next step is to settle on a specific mutual fund. Most companies offer a fund family of at least four or five products with differing goals. For example, money market funds are nearly as safe as a savings account, while aggressive equity funds offer higher returns with a corresponding increase in risk. If you're in your twenties and investing for retirement, it's okay to be gung-ho and put your monthly payment into equity funds for long-term growth. If you just want to build up a nest egg, you're better off with a less volatile bond fund or money market fund that will protect your cash.
Making regular monthly investments has several benefits. Establishing the habit of investing every month is one of the most fundamental. You'll also benefit from a process called "dollar cost averaging." When the markets are down, your $25 will buy more units in the fund. That reduces your average cost, and lets you eventually make more profit. As your ability to invest improves over time, so will your choices. You might find better returns with a fund that requires $100 per month, or an initial investment of a few thousand dollars. Yet, all of these longer-term benefits grow from your original decision to invest $25 regularly.
- Jupiterimages/Comstock/Getty Images
- Can I Use TSP to Invest in Gold?
- Should I Keep Money in a Mutual Fund or Sell It?
- How to Invest in 20 Year Mutual Funds
- Institutional Vs. Non-Institutional Money Market
- What Mix of Mutual Funds to Put in an IRA?
- Nonproprietary Vs. Proprietary Mutual Fund
- List of Investment Boutiques
- The Determinants of Mutual Fund Performance