High minimum investment indicator of good fund?

Discuss all general (i.e. non-personal) investing questions and issues, investing news, and theory.
Post Reply
winglessangel31
Posts: 211
Joined: Tue Feb 12, 2013 4:53 pm

High minimum investment indicator of good fund?

Post by winglessangel31 » Sat Mar 09, 2013 12:24 pm

Hey there,

I'm pretty new here, and recently bought the two Bogleheads' Guides. I'm still reading them, but something caught my mind. Is there anyone else out there who thinks that a high minimum investment is an indicator of a good fund? I mean, yes, beware of the expense ratios, but is there any sort of conventional wisdom in this? Not exactly comparing Vanguard Admiral vs non-Admiral because they are essentially the same fund, but maybe taking VIIIX into perspective?

retiredjg
Posts: 34373
Joined: Thu Jan 10, 2008 12:56 pm

Re: High minimum investment indicator of good fund?

Post by retiredjg » Sat Mar 09, 2013 12:35 pm

VIIIX is the Vanguard Institutional Index - the 500 Index fund that is used in 401k and other work plans. It has a larger minimum and lower expense ratio because it is offered to large groups. As far as I know this is just a volume discount and the fund is the same 500 Index that is offered in the Investor share class of the 500 Index and the Admiral share class of the 500 Index.

I don't think a high minimum investment is an indicator of a good fund - other than getting the lower expense ratio.

User avatar
Orion
Posts: 509
Joined: Mon Feb 19, 2007 11:52 pm

Re: High minimum investment indicator of good fund?

Post by Orion » Sat Mar 09, 2013 12:39 pm

I believe hedge funds tend to have high minimum investments and have not performed that well.

Cash
Posts: 1339
Joined: Wed Mar 10, 2010 10:52 am

Re: High minimum investment indicator of good fund?

Post by Cash » Sat Mar 09, 2013 12:40 pm

No. See hedge funds.

Dandy
Posts: 5465
Joined: Sun Apr 25, 2010 7:42 pm

Re: High minimum investment indicator of good fund?

Post by Dandy » Sun Mar 10, 2013 8:38 am

High initial investments means the fund is geared to institutional investors so the expense ratio is usually lower - often much lower. The fund may have some other features to attract/keep institutional investors happy. Just because a fund is geared to this market doesn't mean it is a good performer. In Vanguard's case their "regular funds have such low expense ratios that it usually doens't make sense to try to get an institutional version of their funds.

User avatar
nisiprius
Advisory Board
Posts: 37051
Joined: Thu Jul 26, 2007 9:33 am
Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry

Re: High minimum investment indicator of good fund?

Post by nisiprius » Sun Mar 10, 2013 9:49 am

No, a high minimum investment is not an indicator of a good fund.

If you want one single number you can look at, I think most Bogleheads would suggest that a low expense ratio is one of many indicators of a good fund.

In cases where a fund company
a) has more than one share class of the same fund,
b) has a share class that has a lower expense ratio and a higher minimum investment than the ordinary share classes,

then, obviously, if you want that fund in the first place and if you can afford to commit to the minimum, the share class with the lower expense ratio is a wee bit better--to the exact extent of the difference in expense ratio.

Bogleheads are very attentive to expense ratios, but it is my personal opinion that the difference between a fund with an expense ratio of 1.20% and one with an expense ratio of 0.20% is 1.00%, but that the difference between a fund with an expense ratio of 0.20% and one with an expense ratio of 0.10% is only 0.10%. That's just my opinion, of course. :D Seriously, when it comes to expense ratios, by all means look for low-cost funds but do the math and consider the amount of the difference and not just the direction.

P.S. The Vanguard Market Neutral fund, VMNFX has a minimum purchase of $250,000. It is, IMAO (in my arrogant opinion), a bad fund.
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.

User avatar
midareff
Posts: 5853
Joined: Mon Nov 29, 2010 10:43 am
Location: Biscayne Bay, South Florida

Re: High minimum investment indicator of good fund?

Post by midareff » Sun Mar 10, 2013 9:52 am

Orion wrote:I believe hedge funds tend to have high minimum investments and have not performed that well.
+1

Akiva
Posts: 534
Joined: Tue Feb 15, 2011 2:33 pm

Re: High minimum investment indicator of good fund?

Post by Akiva » Tue Mar 12, 2013 10:31 am

Orion wrote:I believe hedge funds tend to have high minimum investments and have not performed that well.
A couple of people have made comments like this re: hedge funds. And while it's off topic for this thread (which is about mutual funds), I think it's worth pointing out that hedge funds are not supposed to beat the stock market on an absolute basis, they are supposed to have superior risk-adjusted returns. And if you look at e.g. the HRFI Fund of Funds index, it has trailed the stock market by about 80 basis points a year, but did so with less than half the volatility. (This shouldn't be taken to imply that a retail investor can expect to earn index like returns in this space however...)

As for the question that the thread is actually about, I don't think the minimum amounts are terribly indicative of anything relevant to the retail investor. The fees the fund charges OTOH are very important.

Post Reply