Schwab Mutual Funds: Ideal for Investors With Limited Means?

A common criticism of mutual funds is that many fund families have a relatively high minimum investment, often in the $1000-$3000 range. Thus, it can be difficult for someone who is just starting out to build a diversified mutual fund portfolio.

While it’s no secret that I’m a huge fan of The Vanguard Group, I thought I’d point that Schwab has reduced the minimum initial investment on their mutual funds to $100 each. Their expenses ratios are also very competitive. For example, the S&P 500 and Total Stock Market Funds weigh in at 0.09%

If you’re looking to get started investing, but the high minimum investments have been scaring you off, then you should definitely check out Schwab Funds. And no, they didn’t pay me to say this. 🙂

12 Responses to “Schwab Mutual Funds: Ideal for Investors With Limited Means?”

  1. Anonymous

    Great timing on this article, I’m in the process of selling my kid’s stocks and reinvesting the money into 4 or 5 of the Schwab mutual funds.

    If you have UTMA accounts setup for your kids, this is a great way to starting them down a great path to investing!

  2. Anonymous

    WOW! Thanks Michael. We actually do have a bit of an emergency fund (around $2000) so that’s already taken care of. I’ve just been bad at getting started with my own retirement, so this is good news.

  3. Anonymous

    While many of the fund companies list a minimum investment, it’s been my experience that many of them will waive the minimums if you simply sign up for a systematic contribution plan. Some companies only require $25 per deduction while others will be up to $100. Keep in mind that these deductions need not be monthly, but can be quarterly as well.

    @Aaron – Fund expenses can be changed at any time, but you will be informed of these changes when you receive your monthly/quarterly/semi-annual/annual reports. Some fund companies list the expenses on the statement while others will have them in the fund literature that is required to be distributed to you periodically.

    As for the question of a for profit versus not for profit, it’s irrelevant. Even non-profit companies must make some kind of a profit. The better distinction for my money is private versus public and the way in which fund managers are compensated (long-term or short-term performance). In the case of American Funds, they have one of the best compensation mechanisms in the industry as they parse their portfolios among a number of portfolio managers that only handle a certain number of dollars within a fund. In addition, they compensate their managers based on long-term performance compared to others that do it on quarterly and one-year returns. This is a big difference and one of the key reasons they didn’t get sucked into the tech bubble or chased real estate like other fund companies.

    As to moving money later, Schwab funds are a little more painful to transfer out because many custodians (the company/brokerage holding your funds) are not able to hold these funds. Ultimately, you should be able to find what you need at Schwab, Vanguard, Fidelity, T. Rowe, etc. A transfer of assets of retirement accounts triggers no tax consequence if it’s done properly, but if one custodian cannot hold a fund (Schwab Fund X, for example), you will need to liquidate it prior to transfer. A TOA (transfer of assets) will take anywhere from a week to several weeks depending on when the old company transfers to the new company. Also, a TOA usually carries a fee of some sort. The most common I’ve seen is between $50 and $100.

    One last thing, if you don’t have an adequate emergency fund, you can either (1) save in a cash account or (2) open a Roth IRA and invest in cash. IRAs often have annual maintenance fees so option 1 is usually better. I point this out because often we miss this important step in our eagerness to get busy with retirement. Having an emergency fund is critically important because if you do have an emergency and don’t have the cash available, reaching into retirement account can be expensive as a result of taxes and penalties in addition to the ongoing fees charged to custody the assets…not to mention the market risks inherent with stocks.

    Hopefully this is helpful.

  4. Anonymous

    Thanks Jon. I could see how switching would work if bot firms offered the same fund, but how does it work if they don’t? Is it like cashing it out (paying fees & taxes) and then opening a new account? Cause that sounds bad. =)

  5. Anonymous

    You can switch brokerage firms at anytime. You can also have multiple IRAs at different firms too. You will not be taxed if you don’t go over the $5000 limit on all of your accounts. But if you do switch make sure to check if any fees apply. I switched earlier this year and wasn’t aware of the fee that ETrade would charge if I switched. That was a $60 surprise.

    Also Schwab is nice because once you invest the initial $100 the minimums after that are only $1.

  6. Anonymous

    Thanks for sharing nickel; I’m actually just getting started (a bit late @ 31), but can’t meet the minimums @ Vanguard yet. I was thinking of starting with the STAR fund, but even that would be 5+ months away. Not completely just starting, we’ve been putting money into the wifes 401k (American Funds) for a couple years. Not much there yet (working on CC debt), but at least we’ve started.

    Seems I can get started for less @ Schwab. Is there any way to change companies once I meet the minimums @ Vanguard? Even though their fees are a bit higher, it looks like the really lower rates @ Schwab can be expired at anytime. That makes me a little nervous. Plus, since Schwab is a for profit company, it would be really easy for them to take a loss on the index funds and make up for it by pushing really high cost stuff. Perhaps this makes sense. Or, is it stupid since I assume I would take a tax hit of some sort by changing companies. Sorry for asking stupid questions. =)

  7. Cathy: The problem with ETFs for something with a small bankroll is that the commissions will eat you alive. Sure, there are “free” brokers out there, but they typically require a high minimum deposit to get the free trades (e.g., $25k with Zecco). Even if you get trades for $3-$5, that’s a 3-5% commission on a $100 investment. Not good.

  8. Anonymous

    If you don’t have a lot of money to invest, you might also consider ETFs as they trade like stocks so there aren’t any minimums. Vanguard has some nice ones. Some investors prefer ETFs as they tend to have lower expense ratios too.

  9. Anonymous

    I agree. Being a fresh graduate I had very little funds (or knowhow) when it came to investing. I really had no idea where to start and the upfront fees set by most other firms was intimidating. I been using these funds for a few months now have no complaints. The Schwab funds mentioned above are really good. I also have the target dates funds (net expense ratios of ~0.77%) are a bit high not not that unreasonable for someone just getting started (and with limited start up capital). Also, there customer has been really great – a nice plus!

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