For first-time investors, big mutuals think small

STAYING AHEAD

May 16, 1994|By JANE BRYANT QUINN | JANE BRYANT QUINN,Washington Post Writers Group

WASHINGTON -- How many mutual funds let you start with investments of $100 or less? At least 100, according to Morningstar in Chicago, and a random check of some well-known fund groups suggests that there are many more.

Such small beginnings used to be a rarity. Funds offered to individuals more commonly require you to start with at least $1,000 to $3,000.

But the competitive fund industry is getting more interested in small accounts. They attract first-timers, who may have more money in the future. And they're useful to parents or grandparents who want to start fund accounts for children.

You generally can't invest just $50 or $100 and walk away. In return for letting you start with so little, most funds require you to make an investment every month. You arrange with your bank for automatic transfers out of your checking or savings account and into fund shares.

That approach makes good sense. A mere $100 won't get you anywhere, but $100 a month for many years will build into something worth talking about. Depending on the fund, you can start with as little as $20 a month. Some allow $50 a quarter. As your income goes up, you can increase the amount you invest. If your income goes down, you can usually suspend your monthly transfers (check the fund's rules on this).

In a given fund family, some funds but not others may accept small accounts. Among the no-load (no sales charge) funds with small automatic-investment plans: INVESCO and Janus in Denver, T. Rowe Price in Baltimore and Twentieth Century in Kansas City, Mo.

Among the load funds with such plans: the AIM group (maximum upfront sales charge, 5.5 percent), the Franklin funds (sales charge, around 4.25 percent), the Templeton funds (most at 5.75 percent), the Oppenheimer funds (5.75 percent on stock funds, 4.75 percent on bond funds) and The New England funds, including the high-performing New England Growth Fund (also around 5.75 percent).

With load funds, you pay the sales charge on each new investment but not on reinvested dividends or capital gains.

Most of the Franklin and Templeton funds are also available for a flat $100, with no further investment. But that's not a productive way to build capital. You need to commit yourself long-term.

If you're interested in a particular mutual fund, ask if it waives its minimum for automatic investment plans. Many do.

Some big names do not, however. Among the fund groups that won't waive their minimum investments, according to a random sampling of the funds' information services by my associate, Amy Eskind: Fidelity, Benham, Crabbe Huson and Dean Witter.

Some funds offer lower minimums only on retirement plans, but they rarely drop to the $20 range. More likely, you'll need $250 to $500 to start an individual retirement account.

Another group of funds with low minimums are the contractual plans, including AIM Summit, Fidelity Destiny I and II and Templeton Capital Accumulator.

With a contractual plan, you make a long-term commitment, says Don Frizzell of United Services Planning Association in Fort Worth, Texas, which sells these plans principally to military professionals. The Capital Accumulator contract, for example, requires a minimum of $93.75 a month for at least 15 years.

In the first 12 months, a full half of everything you invest in a contractual plan is eaten up by sales charges. So it's financial suicide to start if you might not be able to continue. After the first year, you pay sales charges on a sliding scale, with 6.07 percent for the smallest accounts. Over 15 years, you pay up to 9 percent for the Templeton fund, Frizzell says. The Fidelity Destiny funds cost up to 8.67 percent over 15 years.

The Destiny funds have averaged a superior 21.4 percent over the past three years, according to Morningstar, while AIM Summit did 13.8 percent. The Templeton fund did 40 percent last year, but won't be able to keep up that pace.

Contractual plans are initially much more expensive than buying the typical load fund, because of the high upfront sales charge. But the funds in these plans have low annual expenses, so you pay somewhat less in costs every year than other funds charge. Over long periods of time (15 years or more), the low annual expenses outweigh the disadvantage of high upfront costs -- which is another way of saying, buy these plans only if you will stick for the long term.

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