I have surplus money, which I want to invest in a cash fund. It has been brought to my knowledge that these funds have a high initial investment requirement. Is that true? If yes, why? Do equity funds have a high initial investment limit too?
Himanshu Tayal, via e-mail
Just as adult movies are clearly prohibited for under 18-year-olds, mutual funds too have a certain cut-off. Depending on the investment objective and the target audience, a fund sets a certain minimum for initial and subsequent investments. If the target is a big-ticket investor, the initial minimum investment limit is kept high and vice versa.
Usually, a cash fund—which invests in short-term debt instruments—has a high initial investment limit to keep servicing costs per unit holder low. Since returns here are generally lower in comparison to other medium- and long-term funds, high expenses could eat into a cash fund's returns. Moreover, it works out expensive if you have to service small accounts, particularly when returns are low.
Therefore, most short-term funds have a higher initial investment limit. For example, to buy units of IDBI Principal Cash-Call Fund, you need to fork out a minimum of Rs 1 lakh. At the same time, asset management companies are trying to popularise these funds among retail investors by bringing down the minimum investment limit. Thus, JM High Liquidity and DSPML Liqui-dity have fixed a minimum investment of just Rs 1,000.
Some cash funds also have a separate initial investment for both growth and dividend plans. Since returns are low, to make the dividend amount substantial, dividend plans usually have higher initial investment. For example, a dividend of 1 per cent on Rs 5,000 (face value: Rs 10) would amount to Rs 50, whereas on Rs 1 lakh (face value: Rs 10), it would translate to Rs 1,000.
As for equity funds, the initial minimum investment ranges between Rs 500 and Rs 5,000. Since returns generated by these funds are much higher than those by short-term funds, a slightly higher expense gets nullified. Also, as these funds are targeted at retail investors, the minimum amount is kept much lower. In fact, tax-saving funds generally have a minimum investment amount of just Rs 500.
Recently, many fund houses have launched separate institutional plans, targeted at big investors. Here, initial investments have been kept high. For example, the initial investment for the newly-launched Deutsche Premier Bond Institutional Fund is Rs 1 crore. Since it is cost-efficient to handle big accounts, expenses are relatively lower. This will help institutional funds generate relatively higher returns compared to other funds.
This article was originally published on June 24, 2003.
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