Understanding what a minimum purchase is does not seem like it should be all that hard to understand. Until you see all the different types of minimum purchases listed.
You may be wondering:
Why so many?
What is the difference between all them?
How can something so easy not be easy?
Why does investing have to have so many terms?
We are going to run though the three main types of mutual fund minimum purchases that you will encounter. Plus why there are different types to begin with!
The first type of minimum investment is the basic initial investment. This is the amount that you must first deposit to open a taxable mutual fund. This option requires the largest cash up front.
Mutual fund companies have costs associated with each account. These can include statement fees, reporting and customer service. If you are not setting up your account to automatically invest then they must ensure that when you open the account it can be profitable.
This is why the initial minimum is the highest of all minimums.
The next type of initial investment is the Initial IRA (individual retirement account).
This is lower than the standard initial investment. With an IRA you are less likely to take the money out of the account because of the regulations set by the IRS.
Due to these regulations, the mutual fund companies know that your account it will be with them longer. Thus the money has more time to grow and they can recoup costs.
The initial investment option with the lowest minimum is the Automatic Investment Plan (AIP).
The AIP is how much you have to invest up front when you are planning to contribute to on a regular basis.
The company will allow a lower beginning investment because they know you will invest more. Thus your account will be large enough to cover their expenses.
The other minimum purchase that you may see is the follow up investment amount.
This is how much your investments must be after you have opened the account. There may be separate follow up minimums for different types of accounts.
For example your initial minimum investment into a taxable account may be $2,500 and all follow up investments must be $100.
When evaluating a mutual fund make sure that you can afford both the initial investment and the follow up investments.