Big Returns for Small Investors in Mutual Funds

It’s an age-old question: How do you invest a small amount of money with a minimum of effort and risk, and a maximum of return?

At a time when double-digit interest rates are nowhere to be found--and when more and more mutual fund companies are requiring bigger investments--the question has investors reeling.

“I wish financial experts would consider the little guy,” complains Lucille C. Bell, a Bakersfield resident. “Not all of us are in the high tax brackets and living in expensive homes. Yet we do need to play the market a little in order to protect our hard-earned dollars.”

So, where can you invest between $250 and $500 when 2% to 5% returns on certificates of deposit and savings bonds leave you cold?

Mutual funds, says Don Phillips, a principal at Morningstar Investments in Chicago.

“The idea of putting together a diversified portfolio of stocks with that dollar amount doesn’t work,” Phillips says. “You would only be able to buy single shares, and the transaction fees would wipe you out. Outside of keeping your money in the bank, a mutual fund is the only way to go.”

Yet it’s even tough to find a mutual fund that accepts such small investments these days. Over the last year, several fund companies have hiked their investment minimums to limit the number of small accounts.

The reason for that is simple, says Lorrie Weiser, a spokeswoman for Janus Funds in Denver. Small accounts generally aren’t profitable for the fund company. They generate just a few dollars in fees each year, but still require the same--or more--work as big accounts. Janus estimates that it loses money on any account with a balance of less than $1,300.

But the good news is that a handful of fund companies still cater to small investors. And several of their funds boast returns that could make millionaires envious.

Indeed, more than 150 mutual funds that allow investments of $500 or less have posted average annual returns of 10% or more over the last 10 years, according to Phillips. That puts their performance in the top 13% of all funds in the nation, he notes.

Additionally, a large number of funds that don’t ordinarily accept small accounts break the rules if you’re saving for retirement. So even though you can’t dump $500 of your kid’s college fund in the Fidelity Capital and Income Fund, which earned more than 28% last year, you can drop your IRA contribution there. An added bonus is that many mutual fund companies, including Fidelity, have recently opted to waive their annual retirement account fees once you accumulate a certain amount. (At Fidelity, that’s $5,000.)

Other fund companies will waive minimum investment requirements if you agree to invest regularly. Those regular investments can be as little as $25 to $50 a month.

Consider Twentieth Century Mutual Funds in Kansas City. The company accepted any size account until early this year, but recently decided to up investment minimums to $1,000 per account. Still, the copany maintains its “no investment minimum” stance for those willing to invest as little as $25 a month, or $300 annually, through automatic savings plans.

Once your get your account balance past the $1,000 mark, you can stop adding money, says Gunnar Hughes, a Twentieth Century spokesman. But the company believes that investors will get hooked on the concept of regular investing once they realize how quickly they can accumulate a healthy nest egg.

The returns? Twentieth Century has two funds that have been in operation for 20 years--Select Investors and Growth Investors. Average annual rates of return for those two funds are 19.01% and 19.4%, respectively. Over the same time period, the Standard & Poor’s 500--a key stock market index--earned 11.8%.

Janus Funds sponsors a similar program. However, its minimum monthly investment is $50, or $600 annually. Over the last five years, the company’s flagship fund, Janus Fund, earned 21.18% on average. It earned 15.58% during the 12 months ended March 31, compared to 15.23% for the S&P; 500. And since its inception in 1970, it has earned an average annual return of 17.19%.

Other funds that accept small investments: Berger 100, a growth fund that earned 12.01% over the last year and 15.04% on average during the last 10 years; Nicholas Growth, a Milwaukee-based fund, which earned 12.41% in the last year and 14.96% on average in the last decade, and the Babson Bond L fund, which earned 13.92% in the last year and 10.93% on average during the last 10 years.

It is important to note, however, that investors shouldn’t bank on short-term performance. Stock and bond prices are volatile. And even the best fund managers suffer when the market is down as a whole.

Twentieth Century’s Growth Fund is a good example. Despite the enviable long-term numbers, the fund has gained just 0.56% during the last 12 months.

You should pick your fund carefully and then just stick with it for three to five years, experts say. Over longer periods, a good fund manager can generate healthy returns.

But, if you bail out before the manager has a chance to prove his or her mettle, the investment could prove more disappointing than those 2% CD yields.