Minimums aren't so minimal anymore

NEW YORK -- Mutual funds are the investment vehicle of choice for millions of Americans, but they're becoming more expensive for beginning investors to buy into.

Minimum initial investments, the money an investor must come up with to open an account with a fund, are going up.

American Century Investments, which has allowed investors to open accounts with only $50 as long as they have that much money automatically deposited each month, is ending that practice as of Oct. 1. All new investors will have to pay American Century's standard $2,500 minimum.

The fund company has also raised the $500 minimum on its American Century Giftrust fund to $2,500 to bring it in line with its other funds.

"Increasingly you're seeing higher minimums and the disappearance of very, very low minimums," said Burton Greenwald, a mutual fund consultant with his own firm, B.J. Greenwald Associates, in Philadelphia. "What's driving this is the fact that the industry is much more sensitive to expense ratios."

The problem is that a proliferation of small accounts drives up a fund manager's expenses without providing much in the way of earnings. It costs the same amount to service an account whether it has $100 in it or $100,000 -- for example, it costs the same amount of money to print and mail reports to investors no matter how much they've put into a fund.

More savvy investors look for funds with lower expenses because ultimately it is the mutual fund investor who pays those expenses, in the form of a lower return.

As minimums increase, fund companies may actually be discouraging some people from getting started. But mutual fund investing has become so widespread that chances are those people with a lot of money to invest are already in the market.

"We have penetrated the majority of households worthy of being penetrated," said mutual fund consultant Jeffrey Bobroff, of East Greenwich, R.I., noting that fund companies would find themselves with diminishing returns if they continued taking on a lot of new, small accounts.

"They want to take large blocks of assets rather than small ones," he said.

Some funds are lowering their minimums as a marketing tool, making it easier for new money to come in.

Driehaus Capital Management, which operates the Driehaus Mutual Funds, lowered the minimum on four small international funds to $10,000 from $100,000. The company said earlier this month it wants to make the fund more available to individual investors.

Similarly, this spring, Freemont Funds waived its minimum entirely on its Freemont U.S. Small Cap Fund so it can draw new money and increase its assets.

And TIAA-CREF Mutual Funds has an extremely low minimum of just $250 per fund, or in a plan similar to American Century's automatic investment policy, $25. The company is new to mutual funds, having established a long and successful record with annuities, and it's looking for business.

According to Greenwald, TIAA-CREF has been able to keep minimums down by keeping its expense ratio at a very low 0.49 percent, compared to the industry norm of 1.10 percent to 1.25 percent.

"They make low cost and efficiency a critical part of their message to investors," Greenwald said.

Part of TIAA-CREF's strategy is that it is run as a nonprofit organization. It began as a retirement and financial services system for employees of colleges, universities, independent schools and other nonprofit education and research institutions. It doesn't have to generate a profit to satisfy stockholders.

According to Morningstar, which tracks mutual fund data, there are currently 2,093 funds with minimum investments up to $1,000. Another 5,166 have minimums between $1,000 and $2,500, and 1,360 have minimums between $2,500 and $5,000.

Between $5,000 and $10,000 there are only 310 funds. Above $10,000, there are 1,852, but most, with minimums above $100,000, are aimed at institutional investors such as pension plans.

A trend toward higher minimums does mean it will take some investors longer to get started. But ideally, if expenses are down, that should translate into higher returns.

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