Lester Freeman
A mutual fund is a type of investment that consists of a portfolio of stocks, bonds, or other securities. Before investing in a mutual fund, it is important to understand the minimum investment amount required, as it impacts the initial investment cost and potential returns. A closed minimum investment in a mutual fund refers to a fund that has stopped accepting new money from investors. This could be due to various reasons, such as the fund's asset base getting too large or reaching a specified amount of assets that preclude it from taking in more money. Closed funds may stop new investments temporarily or permanently, and they can be closed to all new investors or only to new investors, allowing current investors to buy more shares. Mutual funds with higher minimum investment requirements are typically geared towards institutional investors or high-net-worth individuals, while those with lower minimum investment requirements are designed to be more accessible to retail investors.
| Characteristics | Values |
|---|---|
| Definition of a closed fund | A fund that is either closed to investors (temporarily or permanently) or has ceased to exist |
| Reasons for a fund to close | The investment advisor has determined that the fund's asset base is too large to effectively execute its investing style; lack of demand; compliance with the 75-5-10 rule for diversified funds |
| Closed-end fund | A type of mutual fund that issues a fixed number of shares through an initial public offering (IPO) to raise capital for its initial investments |
| Open-end fund | Accepts a constant flow of new investment capital; issues new shares and buys back its own shares on demand |
| Minimum investment | The smallest dollar or share quantity that an investor can purchase when investing in a specific security, fund, or opportunity |
| Minimum investment range | $1 to $1 million or more |
What You'll Learn
Mutual funds with no minimum investment
A closed mutual fund is one that has stopped accepting new money from investors. A closed-end fund is a type of mutual fund that issues a fixed number of shares through an initial public offering (IPO) to raise capital for its initial investments. Its shares can then be bought and sold on a stock exchange, but no new shares will be created, and no new money will flow into the fund.
In contrast, an open-end fund, such as most mutual funds and exchange-traded funds (ETFs), accepts a constant flow of new investment capital. It issues new shares and buys back its own shares on demand.
- Fidelity Nasdaq Composite Index Fund (FNCMX)
- Schwab International Index Fund (SWISX)
- BlackRock Exchange Portfolio (STSEX)
- Fidelity 500 Index Fund (FXAIX)
- Neuberger Berman Small Cap Growth Fund (NSRSX)
- Fidelity Large Cap Growth Index Fund (FSPGX)
- Schwab Total Stock Market Index Fund (SWTSX)
Fidelity also offers several mutual funds with no minimum investment, including:
- Fidelity® ZERO Large Cap Index Fund (FNILX)
- Fidelity® ZERO Extended Market Index Fund (FZIPX)
- Fidelity® ZERO Total Market Index Fund (FZROX)
- Fidelity® ZERO International Index Fund (FZILX)
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Closed-end funds
A closed-end fund is a type of mutual fund that issues a fixed number of shares through an initial public offering (IPO) to raise capital for its initial investments. It is not a traditional mutual fund that is closed to new investors. Instead, it is an investment structure or vehicle.
The initial capital for a closed-end fund is raised through a one-time offering of a limited number of shares in the fund. The shares may then be bought and sold on a public stock exchange, but no new shares can be created.
A closed-end fund lists on a stock exchange where the shares trade like stocks throughout the trading day. Open-end mutual funds price their shares only once a day, at the end of the trading day, basing the price on the net asset value of the portfolio. The stock price of a closed-end fund fluctuates according to the usual forces of supply and demand and the changing values of the fund's holdings.
Because they trade exclusively in the secondary markets, closed-end funds require a brokerage account to buy and sell.
The "closed-end" structure gives rise to discounts and premiums. After the IPO, a closed-end fund's shares trade on the open market, and the market itself determines the share price. This means a closed-end fund can trade at a premium or a discount to its net asset value (NAV). A premium price means the price of a share is above the NAV, while a discount is the opposite, below the NAV.
There are several reasons for this pricing dynamic, including investor perception of high management fees, stockbrokers' reluctance to recommend closed-end funds, and concerns about the true market value of the fund's underlying investments.
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Open-end funds
When investors want to buy shares in an open-end fund, the fund issues new shares, and when investors want to sell, the fund buys back its own shares. The fund sponsor sells and redeems shares directly to and from investors.
They hold diversified portfolios, which lessens risk, and they offer professional money management. They also require low investment minimums.
However, open-end funds must maintain ample cash reserves to meet shareholder redemptions, which can lead to lower yields. They can also charge high fees and expenses, especially if they are actively managed.
Examples of open-end funds include Fidelity's Magellan Fund and the Invesco QQQ ETF, which includes the stock shares of Apple, Google, and Microsoft.
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Minimum investment requirements for institutional investors
A "closed minimum investment" in a mutual fund refers to a closed-end fund, which issues a set number of shares to the public through an initial public offering (IPO). These shares are then traded on the open market via supply and demand, meaning there is no minimum investment amount.
Now, institutional investors are organizations that pool together funds on behalf of others and invest in various financial instruments and asset classes. They include investment funds, insurance funds, pension plans, investment banks, and hedge funds. They are large market actors, such as banks, mutual funds, pensions, and insurance companies, and have greater influence and impact on the market and the companies they invest in compared to individual or retail investors.
The minimum investment requirements for institutional investors in mutual funds can vary significantly. While some mutual funds have no minimum investment requirements, most retail mutual funds require a minimum initial investment of between $500 to $5,000. However, institutional-class funds and hedge funds typically have much higher minimums, often starting at $100,000 or more.
It's important to note that these minimum investment amounts can differ based on the mutual fund in question and the type of institutional investor. For example, pension funds, as a type of institutional investor, may have certain risk and liquidity constraints that influence their minimum investment requirements.
Additionally, the specific strategies and liquidity demands of a fund can also impact the minimum investment size. Fund managers may set a high minimum investment to weed out short-term investors and better regulate cash inflows for more effective asset management.
Overall, while there is no standard minimum investment requirement for institutional investors across all mutual funds, they typically require significantly higher investments compared to individual or retail investors.
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How to determine a minimum investment
A closed minimum investment in a mutual fund refers to a closed-end fund, which is a type of mutual fund that issues a fixed number of shares through an initial public offering (IPO). These funds are closed to new investments and no new shares will be created, nor will new money flow into the fund.
Determining the minimum investment for a mutual fund involves understanding the different types of funds and their requirements:
Understand Closed-End vs Open-End Funds:
Closed-end funds have a fixed number of shares available through an IPO, and they are not subject to minimum investment amounts. You can buy as many units as you can afford on the open market. In contrast, open-end funds are more common and do not have a set number of shares. They are open to new investments and typically enforce a minimum investment, usually ranging from $1,000 to $5,000.
Evaluate Your Investment Options:
Some mutual funds have no minimum investment requirements, allowing investors to start with a small amount, such as $5 or $10. However, most retail mutual funds have minimum initial investments ranging from $500 to $5,000, while institutional-class funds and hedge funds often require at least $100,000.
Consider Your Investment Goals and Budget:
The minimum investment you choose will depend on your financial goals and budget. If you are a beginner investor, you may want to start with a lower minimum investment, which can be as low as $100 or even less. On the other hand, if you are a high net worth individual, you may be comfortable with a higher minimum investment.
Research Specific Funds:
Different mutual funds have different minimum investment requirements. For example, the Vanguard Windsor Fund Investor Shares (VWNDX) has a $3,000 minimum investment, while the Vanguard S&P Mid-Cap 400 Index Fund Institutional Shares (VSPMX) has a $5 million minimum.
Evaluate Fees and Costs:
When determining the minimum investment, consider the fees and costs associated with the fund. Mutual funds have expense ratios, which are annual fees charged as a percentage of your investment. Additionally, some funds may have transaction fees or sales loads. No-load funds, also known as no-transaction-fee funds, do not charge sales commissions and are a more cost-effective option.
By considering these factors, you can make an informed decision about the minimum investment that aligns with your financial goals and the specific requirements of the mutual fund you are interested in.
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Frequently asked questions
A closed fund is a fund that is no longer accepting new money from investors. It may be winding down and terminating, or it may have reached a specified amount of assets that preclude it from taking in more money.
A closed-end fund is a type of mutual fund that issues a fixed number of shares through an initial public offering (IPO) to raise capital. Its shares can be bought and sold on a stock exchange, but no new shares will be created, and no new money will flow into the fund.
A closed-end fund raises a prescribed amount of capital in a one-time offering of a fixed number of shares. In contrast, an open-end fund, such as most mutual funds, accepts a constant flow of new investment capital and issues new shares accordingly.
A minimum investment is the smallest amount of money or shares that an investor can purchase when investing in a specific security, fund, or opportunity. For example, a mutual fund may require a minimum investment of $3,000.
Mutual funds require minimum investments to ensure sufficient capitalization and cover their operating costs. Minimum investments also help fund managers regulate cash inflows and weed out short-term investors.
