Basic Questions About Index Funds

Question

Short and sweet:

1. I notice on every website there is a 'minimum investment' and also a 'price' or a 'NAV' associated with every index fund. If I wanted to open an index fund like Vangard's S&P 500 index (minimum investment $3000 and price $202) what would I have to pay up front? Do I have to buy shares of the fund? I'm confused about what I would have to do to open one of these funds. Do I "buy" the fund for $202 then have to put in a minimum of $3000 to get started?

2. How do I manage an index fund? By manage I mean can I put a portion of my pay check into my index funds each month?

I know these are basic questions but no one on the web has any of this information! HELP!

Answer 1

1. One share costs the 202 $. You need to invest 3000 $ total at a minimum, meaning you have to buy some 14.9 shares at minimum. You should not worry about the exact number of shares, they are just to keep track, and you can buy every decimal part of them too. For example, if you invest now 5000 $, you will get 24.7525 shares. Next year, if they are for example worth 220 $ per share, you have a value of 24.7525 * 220 = 5445.55 $

2. It depends on the offering company, but that (a certain fixed amount per paycheck) is a typical way to invest (and a good way - you implictly take advantage of prices changing a bit - you buy more shares when the price is down and less when it's up). Probably you can make it an automated deduction from your checking account, or you send it every week/month/whenever. Good plan!

Answer 2

Price is current price per share, but you can buy fractional shares.

Minimal investment is how later the first purchase of shares must be to make it worth their efforts to set up the account for you.

How you manage it is up to you. You can buy or sell shares at any time, pretty much, though it may take a few days for the transaction to "settle" and take effect. You can do this via checks, or you can give the broker (or the investment house, if you are dealing directly with them as I do) permission to take money from or put money to your bank account when you tell them you want to buy or sell shares.

You may be able to set up direct deposit; talk to your employer about that. Or you may be able to have your bank make a periodic transfer/purchase for you.

Answer 3

Mutual funds generally have a minimum amount you must start with to own any of the fund. For Vanguard funds, they have a $1,000 minimum for certain target date funds and $3,000 for most everything else.

What you would do is open an account at Vanguard (or other brokerage that handles Vanguard funds) and send them a check for $3,000. After it clears you can specify which fund you want it to go into and it buys what the price at end of day was divided into your account balance number of shares. Fractional share are fine and your balance will not usually be an even number of shares.

Most brokerages will let you set up an automatic transfer where some amount out of your paycheck is put into your account each pay period. You can specify which of the funds you own it goes into. Once you've got the minimum to be in the fund you can add whatever amount you like each month.