Monday, Mar. 19, 2001

Playing It Cheap

By Sharon Epperson

With the funeral march of negative headlines--dwindling corporate profits, massive layoffs and a slowing economy--it's no wonder many budding investors are probably balking at buying even one mutual fund. Making a $2,500 investment in a declining market may seem like dropping money into a grave. But here's a way to resurrect your sinking spirits: think small. You can invest in a stock fund for a few hundred dollars or less.

Some load funds have very low minimums or none at all, although you will have to pay a 4% to 6% sales charge. Finding a no-load fund for under $500 is more difficult. But there are a few fund families that will let you in the door for as little as $25 a month. And when the cost of getting into the stock market is less than dinner for two at Pizzeria Uno, you will be amazed at how quickly your appetite for investing comes back.

If the minimum is $100 or less, there is usually a catch. You will have to sign up for an automatic investment plan. Your bank will send money electronically from your account periodically.

The challenge, if you are picking just a single fund, is to find one that is diversified and fits your investment goal. Says Russel Kinnel, director of fund analysis at Morningstar: "It's really important to start with a core fund. It may wind up being the dominant holding in your portfolio 15 years from now." He suggests you begin with a large-cap U.S. stock fund, like Putnam Research, and then add an international and a small-cap offering.

Pension-fund giant TIAA-CREF--best known for investing retirement savings--also offers 11 funds with a $250 minimum investment, or just $25 a month, in its automatic investment plan. These no-load funds also have some of the lowest expenses in the business. Putnam Research is run a bit differently from other funds in that family's lineup. The fund draws on Putnam's analysts, who pick their favorite stocks to construct the portfolio. It's one of Putnam's smaller large-cap funds, but its returns have consistently been among the firm's best. These gains don't come that cheap, though. It takes only $500 to get started, but the fund tacks on a 5.75% load.

Excelsior Value & Restructuring also requires just $500 to get in--but has no front-end charge. Excelsior's fund manager, David Williams, looks for undervalued stocks and companies that are reinventing themselves. Vern Hayden, a financial planner based in Westport, Conn., says it's his favorite $500 fund, and given its smattering of companies in most major sectors, he would suggest it for nearly any portfolio.

Hundreds of other inexpensive funds pop up on the Mutual Fund Education Alliance's website www.mfea.com) Look at the listings under "Funds for $50 or Less" and "Lowest Minimum Investment." But remember: you don't want to throw money at a fund just because you can get in on the cheap. You still need to look at expenses (they should be less than 1.1%) as well as at the fund's long-term performance, strategy and fund family. Stashing money away in drips and drabs builds discipline for investing. And even though there may be more bad news to come, when prices rise, you will be glad you kept kept your portfolio alive.

Sharon Epperson is a correspondent at CNBC Business News. E-mail her at sharon.epperson@nbc.com