Most 401(k) plans offer their participants a variety of investments and most of these line ups include mutual funds. The risk associated with mutual funds range from conservative to aggressive. They are comprised of pools of money collected from investors that is then invested in a variety of securities (such as stocks, bonds or cash). The three types of mutual funds are money market funds, fixed-income funds and equity funds.
Money Market Funds:
Money market funds typically invest in short-term high-quality investments. In the short term, this type of mutual fund bears the lowest risk, however, does not generate as big of a return as the others.
Fixed-Income Funds (Bond Funds):
Fixed-income funds (also known as bond funds) are generally riskier than money market funds but more conservative than equity funds. These funds have a set rate of return and are focused on investments in government and corporate bonds or other debt instruments. Because of this, they are subject to interest rate risk. If interest rates increase, the fund value will subsequently decrease.
Equity Funds (Stock Funds):
Equity funds (or stock funds) are the most aggressive and generally better suited for long term investments. In the short term, these funds will fluctuate. However, over longer periods of time these funds historically produce greater returns. These funds are risky due to the unpredictability of the stock market and the drastic changes that can take place quickly. It is also important to note that within stock funds there are different categories such as growth funds, income funds, index funds, and sector funds.
A general rule of thumb to follow is the further away you are from retirement, the more aggressive you should be while investing. This is because the stock market tends to outperform other investments over time. Moderate and conservative funds tend to be more predictable and as such, have a smaller return. As everyone’s situation is different, it is important to consult with a professional investment advisor, do your research, and weigh other personal circumstances while making investment decisions.
Do you still have any questions? Please don’t hesitate to contact a Henry+Horne professional to assist you.