A minimum investment is the smallest amount of money or shares that can be purchased when investing in a fund or security. Minimum investments are common in mutual funds, bank accounts, hedge funds, and limited partnerships. Not all funds have minimum investments, so investors should look into this before investing.
Mutual funds typically have a minimum investment that ranges from as low as $100 US Dollars (USD) to $10,000 USD, or more. Funds with higher minimum investments usually do so to discourage short-term investors. When people invest in the mutual fund for longer periods of time, it is easier for the fund managers to estimate the total fund amount at any given time and invest accordingly. Daily fluctuations in the amount of the fund make it more difficult for fund managers to know how much they have available to invest.
A mutual fund with a low minimum investment tends to be an actively managed mutual fund as opposed to an index fund. Actively managed mutual funds are those which use fund managers to decide which stocks to buy and sell. Index funds consist of a group of stocks that are chosen to represent a certain portion of the market. An index fund requires far less trading than an actively managed mutual fund, which reduces annual costs to investors.
Hedge funds are funds that use non-traditional investment strategies to deliver higher-than-average returns. Typically, hedge funds have a limited number of investors and thus have high minimum investments. The minimum investment in a hedge fun ranges from $100,000 USD to more than $1 million USD.
Stocks and bonds require lower minimum investments than mutual and hedge funds. A stock must be purchased in full shares so the minimum investment is the share price of the stock. Bond costs are based on the face price of the bond in question. Brokerages and banks may charge commissions or trade fees on the purchase of stocks and bonds, or require their own minimum purchase amount. It is important to look into additional fees as well to find out what the minimum amount is that is needed to invest.
Bank accounts tend to have small, if any, minimum investment required. Some banks offer additional benefits or higher interest rates for meeting a certain minimum balance. Other accounts charge fees if the balance of the account falls below a certain level. Minimum investment and balance requirements for bank accounts can often be waived by setting up direct deposits from employers or monthly transfers from other accounts.