Mutual funds have many attractions. They permit you to leave critical investment decisions, such as which stocks or investments to buy and sell, and when to do so, to other people -- presumably professionals more talented at investment selection than you are. They give you instant diversification into dozens or hundreds of securities with your first purchase. They offer you instant exposure to all kinds of niches -- Japanese companies, biotech companies, municipal bonds, real estate, etc.
But there's a catch. They're not always inexpensive to get into. For example, according to Morningstar.com, the American Beacon Large Cap Value Fund is rather inviting. It's a five-star fund with a reasonable expense ratio of 0.60%, a manager with nine years' tenure, and results topping the S&P 500 over three years, five years, and 10 years. Unfortunately, its minimum investment amount is $2 million. I don't know about you, but that means that I won't be investing in it anytime soon. (Of course, it doesn't mean I can't peek at its top recent holdings to see whether any pique my interest. These include ConocoPhillips
That's a bit extreme, though. You'll typically find mutual funds with minimum initial investment amounts of $1,000 to $3,000. There are plenty with even more reasonable minimums, of $250, say. I've just learned of an even lower number, though. The folks at AARP (which used to be known as the American Association of Retired Persons) have just introduced a suite of three new mutual funds (they only began trading in January) -- featuring minimum investment amounts of $100 ($25, if you sign up for automatic investments). They're the AARP Aggressive, AARP Moderate, and AARP Conservative.
This is good news for would-be mutual fund investors who don't have hundreds or thousands of dollars to plunk into an initial investment. These funds can help beginners enter the mutual fund arena inexpensively, which is a good thing. Also, they're index-fund-based, which is often a bonus, since most managed mutual funds don't do as well as index funds.
Still, the funds are not a perfect proposition. Over at the FundAlarm.com Annex, David Snowball noted that the funds are all rather conservative. Even the "aggressive" one is invested just 60% in U.S. stocks, 15% in international stocks, and 25% in bonds. He pointed out that Fidelity's Asset Manager Aggressive fund was invested 75% in stocks and had just 5% in bonds. (AARP's Conservative fund is 75% in bonds.)
Snowball concluded: "Bottom line: these are certainly not the cheapest index funds around (Vanguard Balanced and Fidelity Four-in-One each charge 0.20% against AARP's 0.50%), but they are probably the best option for small investors (the Fidelity minimum is $10,000, the Vanguard minimum is $3000 plus a $10/year annoyance fee until your account reaches $10,000) seeking the simplicity of a relatively conservative, one-stop, passive option."
I agree. But I also want to make sure you realize that you have other options which can serve you even better. Stroll through our mutual fund area and you can learn much more. Focus on the index fund info there and consider opting for a low-minimum index fund, especially if your time frame is long-term.
And if you want to do even better than the market average, we'd love to introduce you to some terrific funds with outstanding managers and reasonable fees, via our Motley Fool Champion Funds newsletter. Try it for free and see which funds our analyst Shannon Zimmerman is recommending and has recommended -- and why. Together, his picks have more than doubled the market's return (as of the last time I checked), gaining an average of 21% vs. 10% in the same time period. Out of about 38 picks, none were underwater!
Learn much more in these Zimmerman articles:
- The Case for Mutual Funds
- Mutual Fund Market Beaters
- Mutual Funds for Cheapskates
- Three Reasons to Sell
Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.