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Minimum Investment What it is How it Works Examples

Minimum Investment What it is How it Works Examples

Minimum Investment: What it is, How it Works, Examples

What Is a Minimum Investment?

A minimum investment is the smallest dollar or share quantity that an investor can purchase when investing in a specific security, fund, or opportunity. For example, a hedge fund may require clients to deposit at least $100,000, while a mutual fund may require at least $3,000. This is the minimum investment required for the hedge fund to manage the client’s money.

Minimum investments are not limited to mutual funds or hedge funds. They also exist in fixed-income securities, such as corporate bonds, collateralized mortgage obligations, and limited partnerships. In these cases, investors must invest the minimum specified amount or more, rather than any amount they want.

Key Takeaways

  • The minimum investment is the smallest amount required to buy into a security, asset, or opportunity.
  • Mutual funds and hedge funds typically have minimum investments that can vary significantly.
  • Some assets, like bonds, require a minimum purchase.

How a Minimum Investment Works

Minimum investment amounts vary depending on the mutual fund, ranging from $1.00 to $1 million or more. Hedge fund minimum investments can be even larger, as can some limited partnerships and unit investment trusts. However, there are also many funds with modest minimum investments starting at $100.

Fund managers often set a high minimum investment to weed out short-term investors and regulate cash inflows, which aids in the day-to-day management of assets. High minimum investments also reduce paperwork and bookkeeping by attracting fewer but larger clients.

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Firms may choose to cater to smaller clients with low minimum investment products, while others focus on higher net worth individuals and prefer higher minimum investments. Minimum investment amounts can also vary based on the trading platform.

Special Considerations

Investors must consider minimum investment allocations when seeking new investments. In some markets, brokers or security prices determine the minimum investment required. For example, brokers may require a minimum investment of $5,000 for corporate or Treasury bonds, which can increase for larger clients or businesses.

Many mutual funds and hedge funds can be tracked with exchange-traded funds (ETFs) that do not have minimum investment requirements. ETFs can be purchased with as little as one share, allowing for smaller investments.

Examples of Minimum Investment

Minimum investments vary significantly across mutual and hedge funds. For instance, the Vanguard Windsor Fund Investor Shares (VWNDX) has a minimum investment of $3,000 with additional investments possible in increments as little as $1. The fund has an expense ratio of 0.29%.

On the other end of the spectrum, the Vanguard S&P Mid-Cap 400 Index Fund Institutional Shares (VSPMX) requires a $5 million minimum investment. However, investors can also track the same index using the Vanguard S&P Mid-Cap 400 ETF (IVOO) with as little as one share and a couple of hundred dollars.

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