Companies seek brand loyalty, say they don't profit with small accounts.
Fewer and fewer fund companies allow investors to open an account with a small amount of money. But there are still some gems with low initial minimums.We combed through the Micropal database of 4,071 stock-owning funds for funds that require an initial investment of $500 or less. We excluded load funds - that is, those that charge a sales fee - as well as funds available only through retirement accounts and those either closed to new investors or available only to certain groups.
A mere 54 funds survived these tests, compared with 80 five years ago. The reason for the decline is simple.
"You don't make money on a $500 account," says Ron Muhlenkamp, manager of a fund that bears his name and requires only a $200 minimum. "We spend more on postage to service the account than we make from it."
So why do it? Funds open small accounts because they hope to build brand loyalty.
"Call it a loss leader if you want," Muhlenkamp says.
Most funds have lower minimums for starting an individual retirement account. And many fund families will let you start smaller if you establish an automatic investment plan where your bank is debited each month.
Among funds with minimum initial investments of $500 or less, the following stand out:
- AARP Growth & Income, at (800) 322-2282, is open to all and consistently beats most growth-and-income funds. Manager Rob Hoffman hunts for undervalued stocks yielding 20 percent more than Standard & Poor's 500-stock index.
- Muhlenkamp, at (800) 860-3863, regularly beats the average growth-and-income fund. Muh-len-kamp looks for stocks selling at low prices relative to their earnings. More than 40 percent of the fund's assets are in financial-services stocks.
- Nicholas, at (414) 272-6133, has been managed by Albert Nicholas for 27 years. It typically tracks the S&P 500 fairly closely, but over a 20-year period it has outperformed the index by 4 percent. Nicholas's middle-of-the-road approach emphasizes undervalued stocks with steadily growing earnings.