Choose the right mutual funds for your retirement investing needs.
Your retirement plan provides a wide variety of different investment options. Among these options, your plan may provide access to many different types of funds, including target date funds, investor profile funds, and other mutual funds which we will refer to as “traditional” mutual funds for the purpose of this article. Where target date funds and investor profile mutual funds implement automatic diversification and asset allocation, “traditional” mutual funds typically invest with a single focused purpose in mind. This single focused purpose is typically called the mutual fund’s “investment objective.” To use any mutual fund correctly, you need to understand its investment objective.
Mutual funds pool money from multiple investors (including you!) to buy a portfolio of investments geared to meet a stated investment goal. The fund’s portfolio is selected and managed by professional investment managers.
“Traditional” mutual funds fall into three main investment objective categories:
- Stocks & Equities
- Bonds & Fixed Income
- Money Market & Cash Equivalents
Stock & Equity Funds
Stock & Equity funds will invest most of their pooled monies in corporate stocks. These stocks represent an ownership interest in the underlying company. Stocks are categorized by size or market capitalization and location. For example, there are domestic and foreign stocks, and small, mid or large cap stocks. The value of a stock principally depends on how well the underlying company is doing and whether other investors are interested in buying the stock of that company. Some stocks provide returns in the form of paying dividends, while others provide returns only in the form of increased market value. Stocks are generally the riskiest type of investment, as stock values can rise and fall over short time periods. However, stocks have typically outperformed all other investment types over the long term. If you have a long investment window, stock funds may be the best investment type for you.
Bond & Fixed Income Funds
Bonds are debt obligations of corporations or governmental entities, and are often referred to as “fixed income” investments. When a corporation or governmental entity issues a bond, they are promising to repay the purchase amount, plus interest, over a fixed period of time. Think of a bond like a home mortgage, except this time the tables are turned. When you buy a bond, you are lending money to the issuing entity, and they will pay it back to you over time. The value of a bond can change over time, principally in relation to available market interest rates. Bonds are generally more stable and less risky than stock investments, and are the preferred primary investment type for older investors with fewer years until retirement. Virtually all investors will want to have some portion of their retirement savings invested in bonds.
Money Market or Cash Equivalent Investments
Money market and cash equivalent investments are considered to be the most stable of all investment types, other than plain cash. Unlike cash, these investments will generally provide a very low return, similar to interest paid by some banks on savings accounts. Most investors will want to keep at least a small portion of their retirement savings invested in money market or cash equivalent investments.
Go online today at https://myplanconnection.com to learn more about the investment options available in your retirement savings plan. Once logged into your account, you can access each mutual fund’s prospectus, a Morningstar synopsis of the fund, and fund performance data.