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.
How does investment work explain? ›
Investing involves putting your money to work through the buying and holding of investment products with the expectation of growing your money. It could boost your returns or provide the required amount of income to help achieve your financial goals.
What is investment in simple words with example? ›
The meaning of investment is putting your money into an asset that can grow in value or produce income or both. For example, you can buy equity stock of a listed company in the hopes of receiving regular dividends and capital appreciation in the form of the share price.
What is the minimum amount of money to invest? ›
There's no minimum income you must earn before you can invest. But it's important for your long-term financial security to set aside money for emergencies and to have debt under control. Once you've put those plans into action, you're ready to invest.
What is an example of a simple investment? ›
Cash and cash equivalents such as savings accounts, money markets, and certificates of deposit (CDs) are intended to be relatively safe and accessible. They tend to offer relatively low yields and returns because there's not as much risk associated with these products, like with stocks or bonds.
What is investment short answer? ›
What do you mean by Investment? 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 investment answer in one sentence? ›
Investment is an asset acquired or money committed with a purpose to earn income in future. Investments are also made to benefit from future appreciation in the value of an asset.
What are two examples of investing? ›
Perhaps the most common are stocks, bonds, real estate, and ETFs/mutual funds. Other types of investments to consider are real estate, CDs, annuities, cryptocurrencies, commodities, collectibles, and precious metals.
Which is an example of an investment? ›
A financial portfolio is a collection of investments and holdings like stocks, bonds, mutual funds, commodities, crypto, cash, and cash equivalents. An alternative investment is a financial asset that does not fall into one of the conventional investment categories which are stocks, bonds or cash.
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.
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.
Can I start investing with little money? ›
Purchase fractional shares of stock
Anyone can invest in the stock market. If you prefer to pick the individual companies you want to invest in, you can still invest in stocks without a lot of money. Several new investing apps allow you to buy fractional shares of stock and ETFs.
What is the simplest investment? ›
Cash. A cash bank deposit is the simplest, most easily understandable investment asset—and the safest. It not only gives investors precise knowledge of the interest that they'll earn but also guarantees that they'll get their capital back.
Which is an example of a short investment? ›
Common examples of short-term investments include CDs, money market accounts, high-yield savings accounts, government bonds, and Treasury bills. Although short-term investments typically offer lower rates of return, they are highly liquid and give investors the flexibility to withdraw money quickly, if needed.
How does investing work for dummies? ›
You're not buying a stock; you're buying part of a company. The primary reason you invest in a stock is because the company is making a profit and you want to participate in its long-term success. If you buy a stock when the company isn't making a profit, you're not investing — you're speculating.
How do you explain investment process? ›
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.
How do you explain investing? ›
Investing involves the purchase of assets with the intent of holding them for the long term, while speculation attempts to capitalize on market inefficiencies for short-term profit. Although speculators make informed decisions, speculation cannot usually be categorized as traditional investing.
How do investments make money? ›
Your investments can make money in 1 of 2 ways. The first is through payments—such as interest or dividends. The second is through investment appreciation, aka, capital gains. When your investment appreciates, it increases in value.
