If the Minimum Is an Effort, These Offerings May Help

Along with performance, fees and other such criteria, budget-minded people often select mutual funds based on which firms allow low initial contributions. Yet subsequent-investment amounts are also important--sometimes more so.

Consider Kent Myers’ predicament. The Phoenix man wants to set up custodial accounts for three grandsons, ages 1 to 8. He doesn’t mind contributing $250 or more for each child to get the ball rolling, but he wants the kids’ parents to be able to add cash along the way without making it an expensive exercise each time.

“I’m trying to get their parents to put money into a fund every now and then rather than give them toys,” he says. “The ideal would be a $250 initial minimum plus additional purchases of $25 or $50.”

Myers also hopes to avoid locking the parents into an automatic-investment program. Many mutual fund groups drop their minimums for people who agree to set aside cash on a regular basis. But that means allowing the fund company to pull money out of your paycheck or bank account once a month or so.

Automatic investing is a great way to build wealth over time, but it’s also an imposition if you’re getting someone else involved in the plan.

Most fund families don’t offer minimums as low as Myers would like. The reality is that firms don’t find small investors very desirable because the fees collected from these people might not cover the shareholder-servicing expenses they incur.

Small shareholders generally impose a cost drag until they have amassed at least a few thousand dollars in an account. Such costs typically would be borne by other shareholders, unless the company itself is subsidizing certain outlays.

In fact, the trend in recent years has been to raise investment thresholds, either for initial investments or subsequent investments or both. Twentieth Century Mutual

Funds did a few years back when it switched from a no-minimum policy to a $2,500 requirement on most products. Another option has been to impose small-account maintenance fees, as the Vanguard Group does with investors who hold less than $10,000 in certain index funds.

However, a smattering of low-minimum funds are still available, and they’re worth looking into, especially now if you’re considering making a graduation gift to a youngster.

Most low-minimum funds are sold by load-fund groups, which is a bit ironic because the sales charge typically is not retained by the fund company; rather, it goes to pay the broker or financial planner who closed the sale. Thus, load-fund families find small accounts just as unprofitable as their no-load rivals, yet they continue to offer them.

“We always have believed that it’s important for people just to get started with a savings plan,” says Holly Gibson, a spokeswoman for Franklin Templeton Funds in San Mateo, Calif., which requires a modest $100 initially and just $25 per investment after that. “A lot of people see $100 as doable.”

Anne Patenaude, a spokeswoman for Pioneer Funds in Boston, says her firm’s $50 minimum on its Pioneer I and Pioneer II funds has been a good way to attract new customers. It also engenders loyalty among existing shareholders, many of whom like to use the funds to open custodial accounts for children or grandchildren.

Pioneer’s program is different from those of most other low-minimum competitors in that investors eventually must raise their account balances to $500 or face having their accounts closed and money returned. But they can take more than two years to reach that level.

Although the presence of a lot of small investors in a fund tends to drive up the costs borne by other shareholders, the effect isn’t always dramatic. For example, American Mutual, Pioneer I and Franklin California Growth I are among the low-minimum portfolios with expense ratios at or below 1% a year. Biltmore Equity Index A charges just 0.48%.

Although funds with low initial and subsequent minimums are rare, they provide a valuable service, especially for introducing kids to the stock market.

Myers hopes to teach his grandsons about investment basics and the power of compounding.

“I really would have appreciated it if my folks had done something like this for me,” he says.

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Low-Minimum Families

The following mutual funds and fund groups are among those that allow relatively low minimum and subsequent investments and don’t require that an automatic-investment plan be established.

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Fund/Fund family Minimum initial/ subsequent Sales charge Phone Alliance $250/$50 4.25% (800) 221-5672 American (six funds) $250/$50 5.75% (800) 421-4120 Biltmore $250/$50 4.5% (800) 994-4414 Franklin Templeton $100/$25 4.5% (800) 342-5236 MAP Equity $250/$50 4.75% (800) 559-5535 Muhlenkamp $200/$100 None (800) 860-3863 Pioneer I, II $50/$50 5.75% (800) 225-6292 Security Equity $100/$20 5.75% (800) 888-2461

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