This is the seventh post in our Retirement Investing 101 series written by Amanda Smith, Client Services Specialist at CESI. Check out Part 1, or continue on to Part 8.
Welcome to the wonderful world of mutual funds! The basic definition of a mutual fund is a pool of money gathered by many investors to purchase a wide variety of securities. Mutual funds consist of stocks or bonds. Mutual funds are awesome in my opinion, especially for the small time investor because it allows you the opportunity to diversify your investments while being managed by a professional.
Mutual funds vary in investment options. Mutual funds usually have a specific objective where the financial professional will purchase securities (such as stocks or bonds) based on that objective. For example, a specific fund may be invested all in technology stocks where the fund manager will purchase stocks from only technology companies such as Microsoft or Apple. (Dare I put those two companies together? Yes, I did that!) Other funds may be invested primarily in pharmaceutical or financial companies. These types of funds are good for the investor who is unsure of which company to purchase stock from and would like a wide range of a specific sector.
Not too long ago, age-based and risk tolerant mutual funds were developed for the not-so-savvy investor and have become very popular, especially in retirement accounts. The age-based funds are geared to your expected retirement age. For example, Fidelity Investments offers Fidelity Freedom funds that are age-based such as the Fidelity Freedom 2020 or 2050. The years represent the expected retirement age of the individual, and the fund manager will invest accordingly. Specifically, the Fidelity Freedom 2020 manager will invest more conservatively because one who invests in this fund is most likely to be retiring around the year 2020 which is not very far away. The goal of this fund is to preserve any gains and reduce the risk of losses. The Fidelity Freedom 2050 will have a different objective because the investor will have more time to invest and can afford to be riskier, therefore, the fund manager will invest in more aggressive stocks to gain as much money as possible for the investor.
The risk tolerant funds work very similarly. These funds will usually have the words aggressive or moderate included in the name of the funds as an indicator of how the fund manager will invest. These funds should be invested based on the investor’s risk tolerance and financial goals. Someone who is uncomfortable with a great deal of market fluctuation may not be suited for an aggressive fund.
Aggressive mutual funds are more likely to be invested in stocks because they have higher potential for growth. Conservative funds will have a high concentration of bonds because they have the ability to preserve most of your principal balance. Both of these types of funds, age-based and risk tolerant, are great investment vehicles for someone who does not want to put in too much time toward market research or who does not understand the intricacies of investing.
Regardless of the mutual funds you choose, these are great options to invest in using little money with a wide range of investment options. You can purchase mutual funds through a variety of vehicles including 401k, brokers, mutual fund companies, or within annuities to name a few.
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This article was syndicated and originally appeared on the CESI Debt Solutions website.
