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. A hedge fund, for example, may require that their clients deposit at least $100,000 with the firm. Or, a mutual fund may require at least $3,000 to be invested. This is the minimum investment required for the hedge fund to manage the client's money.
Often thought of in the context of mutual funds or hedge funds, minimum investments are also found in certain fixed-income securities (such as corporate bonds), collateralized mortgage obligations (CMO), and limited partnerships (LP), where a minimum specified amount of money needs to put forth in order buy the security. This means an investor cannot invest or buy any amount they want. They need to invest or buy the minimum amount required, or more.
Key Takeaways
- The minimum investment is the specified smallest amount of capital that is required to buy into or invest in a security, asset, or opportunity.
- Mutual funds and hedge funds typically have minimum investments, although these can vary drastically from hundreds or thousands of dollars right up into the millions.
- Purchasing certain assets may require a minimum purchase, such as bonds.
How a Minimum Investment Works
Minimum investment amounts can vary based on the mutual fund in question and can stretch anywhere from $1.00 all the way to $1 million or more. Hedge fund minimum investments can be even larger, as can some LPs and unit investment trusts. For retail investors, there remains a large selection of funds that have modest minimum investments, usually starting at $100 and up.
A big factor for a fund manager in determining a minimum investment size is the strategy and liquidity demands of the fund itself. By setting a high minimum investment, fund managers can effectively weed out short-term investors and regulate cash inflows to the fund, which can be helpful for the day-to-day management of the assets.
Funds may also impose a high minimum investment to avoid the paperwork and bookkeeping of having lots of clients. A fund may have only a handful of large clients, while another firm may have the same amount of capital under management but that capital was provided by thousands of clients.
Some firms prefer to cater to smaller clients, with low minimum investment products, while other firms prefer higher minimum investments geared toward higher net worth individuals. Other funds may have minimum investment amounts that vary by trading platformdue to arrangements between the broker-dealer and the fund company.
Special Considerations
Generally, investorsmust consider minimum investment allocations when seeking new investments. In other markets, a minimum investment may be set by a broker, or simply by the purchase price of the security (multiplied by the quantity the security can be bought or sold in).
For example, many brokers will require a minimum investment of $5,000 to buy corporate or Treasury bonds. When dealing with larger clients or businesses, the minimum investment may be $25,000, $100,000, or even $1 million or more.
Many mutual funds and hedge funds follow a strategy or simply track an index. Most indexes can be invested in today by buying exchange-traded funds (ETFs). ETFs do not have the minimum investment requirements of many mutual and hedge funds, yet may offer similar returns in many cases. Since ETFs trade like stocks, an investor can purchase as little as one share. Therefore, the minimum investment in an ETF is one share multiplied by the trading price of the ETF.
Examples of Minimum Investment
Minimum investments vary drastically across mutual and hedge funds.
The Vanguard Windsor Fund Investor Shares (VWNDX) has strong long-term performance averaging 11.40% per year going back to 1958, as of April 2021. The minimum investment in the large-capitalization value fund is $3,000. Once invested, clients can invest further funds in increments of 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) has a $5 million minimum investment. As in many cases though, the fund's strategy of tracking the is also available in an ETF which can be purchased for the price of one share. While the price of the Vanguard S&P Mid-Cap 400 ETF (IVOO) fluctuates daily, since as little as one share can be purchased investors can invest with as little as a couple of hundred dollars.
FAQs
A minimum investment is the smallest dollar or share quantity that an investor can purchase when investing in a specific security, fund, or opportunity. A hedge fund, for example, may require that their clients deposit at least $100,000 with the firm. Or, a mutual fund may require at least $3,000 to be invested.
Which is an example of an investment? ›
An investment can refer to any mechanism used for generating future income. This includes the purchase of bonds, stocks, or real estate property, among other examples. Additionally, purchasing a property that can be used to produce goods can be considered an investment.
What is the minimum you should invest? ›
The general rule of thumb is to have at least six months' worth of your household income set aside for emergencies, such as unexpected medical bills or losing your job. If money is tight, start by setting aside a small amount automatically every month. Remember: Starting small is better than doing nothing at all.
What is an example of an investment decision? ›
An investment decision could involve purchasing new equipment, investing in research and development, buying new property, or expanding into new markets. These decisions often have long-term implications and are influenced by a multitude of factors.
Which is an example of a short term investment? ›
Examples of short-term investments include CDs, money market accounts, high-yield savings accounts, government bonds and Treasury bills. These investments are typically high-quality and highly liquid assets or investment vehicles.
What is real investment and examples? ›
Meaning of real investment in English
money that is invested in equipment, machinery, etc., rather than in shares or bonds: Manufacturing output has fallen by 6%, with real investments falling by 12%. Higher taxes on oil should be recycled into real investment in wind and solar power.
What is a real life example of a stock investment? ›
There are many examples of stocks. One widely bought and sold stock is Amazon. Other popular stocks include Apple, Tesla, Facebook, and Microsoft.
Can I invest with $10? ›
Stocks trading under $10 can be attractive for investors looking to scoop up some cheap shares. Unfortunately, quality stocks trading for less than $10 are few and far between. Stocks priced at this level can be a red flag for investors that something serious is wrong with a company.
Is $100 a week enough to invest? ›
Investors should allocate $100 each week and buy shares of dividend-paying companies equipped with strong fundamentals. So, if you invest $100 a week, your equity portfolio would balloon to $5,200 in a year and $26,000 in five years.
Does investing make you money? ›
If you want to become a millionaire, investing money can help make that happen. If you open a brokerage account and begin buying assets that provide a generous return, the money your investments earn can be reinvested and earn even more for you. This is called compound growth, and it's a powerful wealth-building tool.
The investment process is a systematic way to choose where to put your money to achieve your financial goals. It is a roadmap to help you select investments that match your needs, manage your portfolio over time, and stay on track toward your desired outcomes.
What is the safest investment with the highest return? ›
Here are the best low-risk investments in April 2024:
- High-yield savings accounts.
- Money market funds.
- Short-term certificates of deposit.
- Series I savings bonds.
- Treasury bills, notes, bonds and TIPS.
- Corporate bonds.
- Dividend-paying stocks.
- Preferred stocks.
11 best investments right now
- High-yield savings accounts.
- Certificates of deposit (CDs)
- Bonds.
- Money market funds.
- Mutual funds.
- Index Funds.
- Exchange-traded funds.
- Stocks.
Best investments for beginners
- High-yield savings accounts. This can be one of the simplest ways to boost the return on your money above what you're earning in a typical checking account. ...
- Certificates of deposit (CDs) ...
- 401(k) or another workplace retirement plan. ...
- Mutual funds. ...
- ETFs. ...
- Individual stocks.
Investment definition is an asset acquired or invested in to build wealth and save money from the hard earned income or appreciation. Investment meaning is primarily to obtain an additional source of income or gain profit from the investment over a specific period of time.
What is an example of investment by business? ›
Capital investment is the acquisition of physical assets by a company for use in furthering its long-term business goals and objectives. Real estate, manufacturing plants, and machinery are among the assets that are purchased as capital investments.
What are the examples of investment in macroeconomics? ›
In macroeconomics, investment "consists of the additions to the nation's capital stock of buildings, equipment, software, and inventories during a year" or, alternatively, investment spending — "spending on productive physical capital such as machinery and construction of buildings, and on changes to inventories — as ...
What is an example of investment interest? ›
Understanding Investment Interest Expense
A common example of this type of expense is the application of proceeds from a margin loan, taken out with a brokerage, in order to purchase stock.
