mutual funds

Great Funds You Can Own for $500 or Less

Even with just a little seed money, you can find an attractive mutual fund to fit your needs.

The entry fee for many mutual funds is often upward of $2,500 — an amount a lot of folks might consider too steep a price to commit to a single investment. Young investors eager to get in the game might not have enough cash to afford those minimums yet. More-seasoned players might prefer to diversify their portfolios in smaller increments.

Whatever your reason, if you seek a good investment for $500 or less, consider buying into one or more of these no-load mutual funds. Collectively, the six funds, organized by the amount required for a minimum initial investment, don't necessarily constitute a balanced portfolio. However, these diverse offerings can help fill holes in existing portfolios or serve as building blocks for new portfolios. (All returns and related data are as of March 21.)

$100 Funds

A low-cost index mutual fund, which is designed to mirror the performance of a broad market segment, can give you a solid investing foundation that's diversified and simple to understand. With just $100, you can reap the benefits of index-fund investing and make an initial investment in Schwab Total Stock Market Index (SWTSX). It tracks the Dow Jones U.S. Total Stock Market index, which is made up of about 3,600 stocks. While the fund's current portfolio is primarily invested in large-company stocks, it also dips into medium- and small-caps, giving you a good sampling of the entire domestic market.

Schwab Total Stock Market Index has done well over the past year, gaining 24.2% and outpacing the 23.3% return of the widely followed Standard and Poor's 500-stock index. Over the past decade, it has returned an average of 8.2% a year, ahead of the S&P 500's 7.5% annualized return and better than 85% of the funds in the "large blend" category. (Large blend funds invest in stocks with both growth and value attributes, and are fairly representative of the overall stock market.) The fund's annual expenses are a very low 0.09%.

Schwab also offers a set of target-date funds with low minimum investment requirements. Another easy core option for your portfolio, a target-date fund asks you to simply pick the year you want to reach your investing goal (typically, retirement), and the corresponding fund's managers take care of the rest. They select the appropriate mix of investments based on your time horizon and adjust the portfolio as your selected year nears. For example, a 24-year-old aiming to retire at age 65 would opt for Schwab Target 2055 (SWORX), which opened in January 2013. The fund requires an initial investment of just $100; annual expenses are 0.73%.

Being so young, the fund has little past performance to recommend (or disparage) it, but its older siblings — guided by the same manager, Zifan Tang — indicate a promising future. Over the past three years, Schwab Target 2025 (SWHRX) has gained 10.2% annualized, beating its category by an average of 1.8 percentage points a year and ranking it in the top 8% of all 2021-25 target-date funds. Since Tang took the reins in 2012, the fund has gained a total of 26.5%, topping its category by 4.9 percentage points.

One note on fund performance figures: Stocks have been on a tear since the last bear market ended in March 2009, resulting in outsized gains during the past five years. Over the long term, the average annual return of the stock market is closer to 10%.

$250 Funds

If you want to raise your portfolio's moral standard, consider this pair of so-called socially responsible funds, which invest according to clearly established principles. Amana Growth Investor (AMAGX) and Amana Income Investor (AMANX) are run in adherence to Islamic law, meaning they do not invest in businesses involving alcohol, gambling, tobacco or pornography. They also avoid businesses that charge interest, such as banks, and investments that pay interest, such as bonds. Both funds invest primarily in large companies, but the Growth fund focuses on fast-growing firms, while the Income fund seeks undervalued stocks that pay dividends.

The strategies, including the ethical code, have hindered the funds recently. "This bull market of the past five years hasn't been very favorable," says Morningstar analyst David Kathman. "With interest rates so low and money so cheap, it's given a boost to companies that aren't necessarily pristine, and those are not the types of companies that these funds own." Restricted from holding firms that carry too much debt (which Amana defines as more than one-third of their market capitalizations), Growth has gained a relatively tame 20.9% over the past year, lagging the S&P 500 by about 2.4 percentage points and anchoring it to the bottom 9% of its large-growth category. Similarly, Income has returned 19.4%, or 3.9 points less than the index, and ranks below 80% of its large-blend peers. The Income fund yields 1.4%, a full percentage point better than the Growth fund.

Over the longer term, however, performance was significantly better because their lack of financial companies and highly leveraged firms served them well during the last bear market. In the past decade, both funds score top rankings, with Growth gaining 10.9% annualized, or an average 3.3 percentage points more per year than the S&P 500, and Income earning 11.2% annualized, or an average 3.6 points a year better than the index. Each fund requires $250 to buy in; Growth and Income have expense ratios of 1.11% and 1.18%, respectively.

The Amana funds are poised to perform well in the future as well, says Kathman. "Eventually the economy will start to get a little better, interest rates will have to rise, and when that happens, I think these funds will look better."

$500 Funds

Investors can't live by large-caps alone. Well-balanced portfolios also call for the stocks of small to medium-size companies. There's no hard-and-fast rule, but small-cap stocks typically have market capitalizations up to $1 billion; mid-caps, $1 billion to $10 billion. (Market cap is calculated by multiplying share price by the number of shares outstanding.)

Homestead Small Company Stock (HSCSX) may focus on the small, but it can be a big winner for your portfolio. Requiring a buy-in of just $500, it's the only member of the Kiplinger 25, our favorite no-load mutual funds, with a minimum initial investment below $1,000, and it keeps expenses low, charging 0.91% a year. The affordability doesn't discount results. It has lagged the Russell 2000 index of small-company stocks over the past year by 2.4 percentage points, but it still gained a respectable 25.8%. And it has beaten its benchmark over three-, five- and ten-year periods. Over the past 15 years, the fund earned 12.1% annualized, topping the Russell 2000 by an average of 3.0 percentage points a year.

To get more yield out of your portfolio, try Nicholas Equity Income (NSEIX), which requires an initial $500 investment and charges 0.75% in annual expenses. The fund invests in dividend-paying companies of all sizes and aims to pay a higher yield than the S&P 500. Achieving that goal, it currently has a 30-day SEC yield of 2.7%, beating the index's 1.9% dividend yield. Over the past year, the fund has posted a return of 18.0%, lagging the S&P 500 by 5.3 percentage points. Long-term results are better: Over the past ten years, it has gained 10.6% annualized, topping the S&P 500 by an average 3.1 points a year and putting it in the top 7% of funds in its mid-cap value category.

Most Popular

Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer
Coronavirus and Your Money

Where's My Stimulus Check? Use the IRS's "Get My Payment" Portal to Get an Answer

The IRS has an online tool that lets you track the status of your second stimulus check.
January 18, 2021
When Could We Get a Third Stimulus Check?
Coronavirus and Your Money

When Could We Get a Third Stimulus Check?

President Biden and others in Congress are pushing for a third-round of stimulus checks, but it might be a while before we get them.
January 20, 2021
Don’t Have a Pension? The SECURE Act Could Help
retirement planning

Don’t Have a Pension? The SECURE Act Could Help

If you’re worried about retirement, the SECURE Act has a lot to offer. It has several provisions to allow people to save more, for more years — and it…
January 22, 2021

Recommended

The 7 Best Vanguard Index Funds for 2021
mutual funds

The 7 Best Vanguard Index Funds for 2021

Vanguard index funds are among the cheapest, easiest solutions for investors looking for diversified core holdings. Here are seven top options.
January 25, 2021
Kiplinger’s Mutual Fund Rankings, 2021
Kip 25

Kiplinger’s Mutual Fund Rankings, 2021

In a volatile year, the best portfolios had plenty of opportunity to shine.
January 23, 2021
The 11 Best Vanguard Funds for 2021
mutual funds

The 11 Best Vanguard Funds for 2021

It'd be easy to put together a full 2021 gameplan using nothing but a mix of the best Vanguard funds. Here are 11 that stand out for the year to come.
January 7, 2021
2021's Best Mutual Funds in 401(k) Retirement Plans
mutual funds

2021's Best Mutual Funds in 401(k) Retirement Plans

A key to smart saving for retirement: spreading your portfolio across a few of the best mutual funds in your 401(k) plan. Here, we profile the top opt…
December 29, 2020