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Create wealth with mutual fund share builder accounts

Mutual funds are an excellent vehicle for monthly investments, as they automatically give a degree of diversification to your investment not possible when investing in individual stocks.

Share builder mutual fund accounts allow you to invest in your selected mutual fund each month so that over time you hopefully will build a large and profitable position in your fund.

There are many mutual fund families, but I will limit this column to three: T. Rowe Price, Vanguard and Fidelity, all of which offer share builder accounts.

Each mutual fund group requires different dollar amounts to start an account and different minimum monthly investments to maintain share builder accounts. The initial investments mentioned here apply to accounts in which automatic monthly investments are made after the account is set up.

The big three

T. Rowe Price is the most friendly of the three to small investors. A share builder account can be set up with a $50 initial investment and monthly investments of $50, allowing a novice investor to get started easily.

Most of the T. Rowe Price funds are in the top 20 percent of their investment categories and there are fewer funds in this fund family than in Vanguard or Fidelity. I find this appealing, as it gives you a smaller number of good funds to research as you look for the right fund for you. As with all mutual funds, some funds are closed to new investors; if you are a current investor in the closed fund, you can continue to make additional investments.

Vanguard is a well-known mutual fund family with a large number of funds. Vanguard is famous for having the lowest expenses in the mutual fund industry. The group offers many mutual funds with good returns, including a number of index funds that allow the investor to invest in a stock market index instead of an actively managed fund. The returns on index funds often exceed those of many actively managed funds.

Vanguard does offer share builder accounts, but they require a much higher initial investment to open the account and a higher required monthly investment. The minimum to open an account varies from fund to fund, but the minimum initial investment is generally $3,000, which can increase to $10,000 in some funds. Subsequent monthly investments must be at least $100.

Fidelity is the largest fund family in the group, which can make finding the right fund difficult, though it does offer helpful search functions online. Be sure to limit your search to NTF (no transaction fee) funds. The average Fidelity fund has a $2,500 minimum initial investment with subsequent investments of $100 per month. Like Vanguard, certain funds have larger minimums. You can start an IRA with a $200 initial investment and $200 each month for the first year.

Fidelity funds generally have higher expenses and fees than Vanguard and T. Rowe Price. Also, Fidelity has many funds that have initial commissions on purchases. Fidelity does have some excellent funds, but they may be harder to find than the other fund groups.

Beyond these three, there are other excellent smaller mutual fund families, such as Dodge and Cox, Oakmark, Royce, American Century and others; you can research them online.

Dollar cost averaging

One point you should consider in relation to setting up a mutual fund share builder program is dollar cost averaging. If you buy an equal dollar amount of your mutual fund each month, you will buy a different number of shares with each investment because the price varies. As the price increases, you buy fewer shares with the same amount; as the price decreases you buy more shares with the same amount.

Over time, if the price trends upward, the cost of your shares will be lower than the amount invested. This fact tends to assist in creating gains in your investment during the period of time that you are investing in the fund. It works best when continuous investments are made over a long period of time. Obviously, it does not work when an investment value continuously declines.

See my article on selecting mutual funds for more on choosing one that has gone up in value in good and bad stock market periods. Also be sure to reinvest all your mutual fund dividends and capital gains.

Barbara H. Pietrowski is a licensed certified public accountant, certified financial planner and personal financial specialist. Her practice includes tax preparation, fee-only financial planning and investment management.