When you invest in a particular financial product, you may sometimes come across a minimum investment amount or threshold you need in order to start investing in it. For example, a mutual fund allows individuals to start investing via Systematic Investment Plans with as little as Rs. 100, which makes them accessible to a wider range of investors. On the other hand, hedge funds are targeted at high net-worth individuals and often have much higher minimum investment thresholds, such as Rs. 1 crore, so they remain exclusive to accredited investors.
This amount is set by the financial institutions offering the products, regulatory bodies, and brokers. In this article, we will look at the minimum investment implications of different financial products.
What is Minimum Investment?
Minimum investment refers to the smallest amount in rupees or the smallest quantity of shares one needs to invest in a particular financial instrument or asset, like stocks, mutual funds, bonds, gold, and real estate. This amount may be set by different financial institutions, such as fund houses, intermediaries like brokers, and even regulatory bodies, to establish an entry threshold for investors.
So when someone asks what is the minimum investment amount needed to invest in a particular financial product, they’re simply asking about the smallest amount of money they would need to invest in that asset. A mutual fund, for example, may allow them to invest through a SIP starting at just Rs. 500 per month. However, if they opt for a lump sum investment instead of the SIP route, the minimum required amount could be Rs. 5,000 for the same fund.
Different securities come with different minimum investment amounts. If you’re interested in a particular asset that has a minimum threshold, you’ll need to at least meet that requirement to be able to invest in it. In some cases, this can lead to tough decisions, as you might really like a particular security but may not be willing to meet the minimum amount required to invest in it.
How Minimum Investment Works
The minimum investment amount tells you about the least amount of money you’d need to invest or the least number of shares you’d need to buy in order to start investing in a particular financial product. This amount is set by:
1. Financial institutions
The institution offering the product can set the minimum amount. For example, an asset management company offering mutual funds sets the minimum lump sum or the SIP amount. Similarly, a bank may set the minimum amount one needs to open a fixed deposit.
2. Brokers
While most brokers generally follow the minimum investment amounts set by the issuers of financial products, they can adjust or modify the minimum investment requirements if you choose to invest through them.
3. Regulatory bodies
Bodies such as the Reserve Bank of India and the Securities and Exchange Board of India can set a minimum investment amount to protect investors’ interests or make the markets more stable. For example, SEBI recently lowered the minimum investment amount required to invest in corporate bonds. Previously, a minimum investment of Rs. 1 lakh was required for privately placed corporate bonds. However, after the change in rules, retail investors can invest in corporate bonds with just Rs. 10,000.
Lower minimum investment amounts can help make sure that investing is made accessible to a wider variety of individuals. Higher minimum investment amounts, on the other hand, make sure that only those who can bear the risk and complexity of certain instruments like hedge funds can participate.
Importance of Minimum Investment
Both low and high minimum investment amounts serve a purpose. Here is the Importance of Minimum Investment:
1. Low minimum investment amount
Products like mutual funds offer a very low entry barrier to individuals with limited capital wanting to start their investment journey. Affordable SIPs allow people from wider economic backgrounds to invest and accumulate wealth over time thanks to compounding, all without needing large sums of money upfront. One may argue that individuals can also buy low priced stocks to get started, but they do not provide the level of diversification mutual funds do, thus increasing risk significantly.
2. High minimum investment amount
Financial products like hedge funds or certain private equity investments, target high-net-worth individuals and thus set huge ticket sizes reaching crores. This is because such products use much more advanced and riskier investment strategies that promise to deliver higher returns. They are not as heavily regulated by SEBI as the mutual fund industry, which means there is less protection for investors.
As a result, they are designed for individuals who not only have the financial capacity to handle these risks but also the experience to understand and manage the complex investments involved. The high minimum investment amount hence limits access to accredited investors who can bear the risk associated with these high-reward opportunities.
Minimum Investment in Different Financial Instruments
Here are some financial products and the minimum investment amounts associated with them:
1. Mutual Funds
Mutual funds are diversified financial products offered by asset management companies. There are two ways one can invest in a mutual fund – through an upfront investment called a lump sum payment or through a systematic investment plan.
The minimum investment amount required to start investing in mutual funds is set by the AMC offering them based on factors like the fund’s category, investment strategy, goals, and SEBI’s guidelines. Consequently, the mutual fund minimum investment amount varies from fund to fund. Some funds allow investors to get started with just Rs. 100, whereas some funds set much higher amounts.
2. Stocks and Exchange Traded Funds
Stocks and ETFs are traded on stock exchanges, so they do not have a set minimum amount required in rupees. To get started, investors can buy a single share or ETF, making the price of a single share or ETF unit the minimum investment amount required. Thus, if a stock costs Rs. 30, the minimum investment in stock market would be Rs. 30 (plus any brokerage charges)
3. Real Estate
The minimum investment amount in real estate is quite high and can range from lakhs to crores. However, in recent years, a new type of financial product called REITs has emerged, which gives investors an affordable way to invest in real estate.
REITs stands for Real Estate Investment Trust. Like a mutual fund holds a portfolio of assets like stocks and bonds, a REIT holds a pool of income generating real estate. REITs are simply companies that own and manage this large pool of rent-generating properties. The rent they collect is distributed among investors as dividends. The minimum investment amount required to get started in REITs is significantly lower than physical real estate and it also offers investors diversification through real estate exposure.
4. Bonds
Bonds are issued by different entities to raise capital. For example, the government can issue bonds to fund public infrastructure projects like building roads and dams. Similarly, a corporation can issue bonds to raise funds for expanding its business, acquire new companies, or for research and development purposes.
As previously mentioned, in 2022 SEBI announced that the minimum investment amount required to invest in corporate bonds was slashed from Rs. 1 lakh to Rs. 10,000. This move was made to allow a wider retail investor participation in the fixed income market. Similarly, many government securities like bonds and T-bills were only available to institutional investors or through larger denominations. Now, however, retail investors can directly invest in government securities, starting with as little as Rs. 10,000.
5. Gold
There are many ways to invest in gold and each requires a different minimum investment amount. Physical gold has a higher minimum investment amount as generally, the least amount one can buy is 1 gm. Gold ETFs have similar minimum investment amounts as 1 gold ETF is typically equivalent to 1 gram of gold.
Other avenues, such as gold mutual funds and digital gold can have much lower minimum investment amounts. Gold mutual funds work the same way as any other mutual fund – investors can start a Rs. 100 per month SIP in a gold fund and start to accumulate gold slowly over time. This is an excellent option for those who want to invest in gold without committing a large sum of money upfront.
Digital gold has an even lower minimum investment amount. Investors can either buy gold by weight (measured in milligrams) or by a fixed value, which can be as little as Re.1.
6. Fixed Deposits
Fixed deposits are offered by banks, so the minimum investment amount in an FD varies from one bank to another. The range generally is from Rs. 1,000 to Rs. 10,000.
How to Start with Minimum Investment?
When considering a new investment, you’ll easily be able to find the minimum amount required on documents such as scheme information documents, prospectus, and listings. However, you should consider consulting with a qualified financial advisor before investing.
For example, you might find that a mutual fund SIP, with its lower entry barrier and the added benefit of diversification, seems like a good option over stock investing. But before going ahead, it’s important to assess whether the specific mutual fund you’re considering is the right fit for your financial goals.
The fact that a particular fund has a particular minimum investment requirement doesn’t necessarily make it the best choice for your financial situation and goals. It’s important to assess various factors, such as the fund’s performance, investment strategy, risk profile, and how it aligns with your long-term goals. Here, a financial advisor can give you valuable guidance. An advisor’s role isn’t just to help you make an investment but to make sure that you’re making smart investments. Ones that are tailored to your risk tolerance, financial goals, and investment horizon.
Pros and Cons of Minimum Investment
Advantages of minimum investment:
- A low minimum investment amount makes assets like mutual funds, real estate, and gold more affordable and accessible.
- Lower minimum amounts also allow investors with limited capital to diversify across different assets.
- Investments such as SIPs inculcate a habit of investing. So even if investors start with a low amount initially, they can still build a habit of regularly saving and investing and start compounding their money. With time, the flexibility of SIPs will allow them to increase their contribution and grow their wealth more.
- High minimum investment amounts can help HNI investors gain access to exclusive investment opportunities like hedge funds and private equities which can help them earn higher returns.
Disadvantages of minimum investment:
- Due to the low initial investment amount, even high percentage returns will translate to modest absolute gains.
- Small investments can restrict how much an investor can meaningfully diversify.
- High minimum investment amounts can block small investors from gaining access to high-reward opportunities.
Conclusion
The minimum investment amount refers to the lowest amount of money or quantity of shares required to make a particular investment. For example, in the case of mutual funds, the minimum investment can be as low as Rs. 100 for a systematic investment plan, and for stocks, the minimum investment is just buying a single share, which depends on the stock’s market price. At the other end of the spectrum, some investments such as hedge funds require a much higher minimum investment, reaching Rs. 1 crore or more.
For assets like real estate and gold, the minimum investment amounts for physical forms can be quite high. However, alternative options like REITs and digital gold offer investors a more accessible entry point with lower minimum investment amounts.
