Investors know that one of the first things they are told when considering a new investment is the minimum size of the investment. For example, when investing in a bond, the minimum can be as low as US$1,000 and as high as US$200,000. Your advisor would probably present you with several options with varying minimums. The minimum is often linked to the type of bond, as it may be a plain vanilla or a more sophisticated hybrid security.

WHY DON’T THEY WANT MY MONEY?

When you are hear that a bond has a large minimum purchase amount, you may be a little annoyed that you are unable to invest in the security, especially when it appears to have attractive terms. You may want to know why you are being excluded from this opportunity. It may be due to a desire to reduce the number of investors, if the minimum is set by an investment firm.

Additionally, the investment may be targeted at institutional or highly sophisticated investors and as such, setting a high minimum will eliminate small investors.

There are other reasons cited for setting a high investment minimum. These include: reducing the administrative burden, eliminating short-term investors, and liquidity considerations. In Jamaica, certain investments require only accredited investors who meet specific minimum income/assets or a minimum investment to qualify.

HOW CAN I GET AROUND THE HIGH MINIMUM?

When you invest in a mutual fund, one of the advantages is that you get access to securities with high minimums. The pooling of other investors’ funds allows the fund manager to invest in a wide range of securities, some with very high minimums. So, this is one way of circumventing the minimum requirement.

The other way around it is that some investment firms will break the bond into smaller pieces and resell to investors. This is convenient for the smaller investor, but there are issues. When the small investor decides to sell the bond, the firm must either buy the bond from the investor or wait until they have enough investors to meet the minimum to sell. They are also likely to take a much large spread/cut on the transaction as they cannot sell the small piece on the bond market.

WHAT IF YOU ARE JUST ABLE TO BUY IT?

If you have exactly US$200,000 to invest and you are presented with a bond with a US$200,000 minimum as an investment option, I would not recommend that you purchase that instrument unless you already have a diversified portfolio. Putting all your eggs in one basket or in this case one bond, does not offer sufficient diversification. This is the reason that a mutual fund would be a better option as it would overcome both the access and the diversification challenges. Choose wisely!

Yanique Leiba-Ebanks is the AVP, Trading & Business Development at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual, and institutional investor. Visit our website at www.sterling.com.jm Feedback: If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: info@sterlingasset.net.jm