Mutual funds have been popular investment vehicles and many people are familiar with them as a result of their popularity in employer-sponsored "defined-contribution" retirement plans such as 401k's as well as IRA's. A mutual fund is a company that pools money from many investors and invests the money in stocks, bonds, short-term money-market instruments, other securities or assets, or some combination of these investments. Mutual funds have generally been considered to be safer investments than individual stocks or bonds because of their diversified asset holdings and the fact that a professional manager makes investment decisions for the fund. In recent years, exchange traded funds (ETF's) have become popular as well. ETF's are similar to mutual funds, but the majority of them are designed to track a particular stock, bond, or commodity index. They trade on an exchange and are more efficient than the traditional mutual fund.
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Getting proper 401k advice is essential to maximizing your retirement savings. 401k advice offered by professional advisors is likely to come with exorbitant annual fees attached which will significantly reduce the amount you will have saved by retirement. In this article, we try and give you some 401k advice that will make a meaningful impact on how you invest and grow the money in your 401k. What is a 401k?A 401k plan is a cash or deferred arrangement under which a covered employee can elect to have a portion of his or her compensation contributed to a qualified retirement plan as a pre-tax reduction in salary (however, some plans also accept after-tax contributions from employees). 401k plans are named after the section of the Internal Revenue Code in which they appear, and apply to private-sector employers. Similar salary-deferral retirement plans are authorized in the tax code for public-sector employees (known as 457 plans) and nonprofit-sector employees (known as 403b plans). |
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Mutual and exchange traded funds fall into a variety of categories. Each type of fund has different features and a unique risk/reward mix. Generally speaking, the higher the reward or potential return, the greater the risk. It is important as an investor that you understand your risk tolerance before deciding which type of fund to invest in. Stock FundsStock funds have been the most popular collective investment scheme, with about half of all mutual funds being stock funds. Historically, over the long run, stock funds have outperformed their bond or money market counterparts, but in the short term their value can rise and fall substantially. Stock funds differentiate themselves by the types of securities they invest in. For example: |
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Both mutual and exchange traded funds have their similarities and differences as well as their advantages and disadvantages. In this article, we provide a overview of each fund structure and some details that are essential to an investing decision. Both mutual and exchange traded funds are structured as "open-end" management companies. This means that company distributes and redeems shares of the fund that it issues. This is in contrast to a "closed-end" company which only issues a fixed number of fund shares. Both mutual and exchange traded funds invest in a variety of assets that include stocks, bonds, money market instruments, commodities, and currencies. |
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