I am self-employed and cannot afford to invest more than $1,000 in a mutual fund. How can I get started and have proper diversification? Are there funds with low minimum investments?

Paul's Answer:

You may be surprised to know how many choices you have. The Morningstar database includes eight funds with $50 initial minimums, 82 with minimums of $100 and 342 with minimums of $250.

You might be tempted to buy four funds with $250 each, but I think it makes better sense to invest in a single fund for $1,000. That gives you plenty from which to choose: a total of 4,699 funds, according to Morningstar.

With $1,000, you can choose among the no-load offerings of numerous well-known fund families, including Columbia, Evergreen, Invesco, Safeco, Value Line and Warburg-Pincus.

However, for maximum efficiency and diversification, I suggest you consider an index fund. One good choice would be the Schwab MarketTrack All Equity Fund (swegx). Its portfolio is made up of 45 percent large U.S. companies, 25 percent small U.S. companies and 30 percent international companies. Its expense ratio is 0.54 percent and its minimum initial investment is $1,000. The fund’s 1999 performance through November 8 was 13.8 percent.

A more conservative variation is the Schwab MarketTrack Growth Portfolio (swhgx), which invests 80 percent of its portfolio in stocks, 15 percent in bonds and 5 percent in cash. Performance through November 8 this year was 11.0 percent.

For even more choices, and to help you build up your mutual fund investments, consider investing in a fund with what’s known as an AIP, or Automatic Investment Plan. This is an arrangement in which regular investments are automatically taken from your bank account. Some funds let you start with no initial investment at all, as long as you agree to make regular automatic investments (for example Safeco Mutual Funds).

AIP programs suddenly widen your choices to include more well-known fund families. Some examples, with their minimum initial investments: American Century ($50), Strong ($50), T. Rowe Price ($50), Dreyfus ($100), Janus ($500), Oakmark ($500), PBHG ($500), Marsico ($1,000) and Scudder ($1,000).