I'm a strong believer in the benefits of index mutual funds.
Their low costs and tax efficiency, combined with the difficulty most active portfolio managers have beating the market, are compelling reasons why index funds should be at the center of any sound investment portfolio.
There's just one problem.
Many of the best index mutual funds are out of reach for beginning investors who do not meet the minimum investments required by many mutual fund families. For instance, the granddaddy of index funds, Vanguard, requires a $3,000 minimum investment for many of its funds.
Fidelity Investments, which offers the super cheap Spartan index funds, requires a $10,000 minimum for most of its index funds.
T. Rowe Price features somewhat lower minimums: $2,500 for taxable accounts and $1,000 for IRAs. To many beginning investors, those figures sound pretty good, but to others, that $1,000 minimum for an IRA still might be out of reach.
Exchange traded funds are a smart, low-cost option for those with established nest eggs, but they are not a viable option for those with small amounts they hope to add to little by little. There are no minimum investments with ETFs, but the brokerage costs associated with buying ETF shares eliminate them from consideration for an investor utilizing an automatic investment plan.
So where does a would-be investor with the right intentions and a belief in the benefits of index investing turn?
The goods news is there are options. There are index funds out there that will accept your money even if you have less than $1,000 to begin with.
First, look at the 401(k) or other retirement savings plan offered through your employer. Many, if not most, employer-sponsored plans offer at least one index fund investment option. Participants in a workplace plan typically can contribute to an index fund without needing to meet the usual minimums.
And in the best employer-sponsored plans, the index funds are super cheap as the available fund may be the institutional version usually only made available to only pension funds, university endowments and other big institutional investors.
I recently encountered a client whose 401(k) featured an index fund tracking the Standard & Poor's 500 with an expense ratio of just .01 percent. On a $1,000 balance, that expense level amounts to just 10 cents a year. That's more than 100 times less than the average mutual fund, which imposes an expense ratio well in excess of 1 percent a year.
Second, if you do not qualify for a workplace retirement plan or for some other reason wish to invest outside an employer-sponsored plan, there are a few index funds that will accept less than a $1,000 minimum, according to Morningstar.
I focused my search on index funds classified by Morningstar as large cap blend. These include funds that track the S&P 500 as well as broader market barometers such as the Wilshire 5000. A large cap blend fund is a good place for a young beginning investor to start investing before branching out into other asset categories, including small caps, international stocks and bonds.