MOST COMMON FUNDS IN RETIREMENT PLANS
Mutual funds are one of best investment choices in retirement plans because of easier diversification. Choosing a mutual fund depends on the individual’s closeness or farness to retirement, risk appetite, and financial goals, as well as 401(k) plan and brokerage’s offering if investing through an IRA.
In the United States, the mutual fund market had $15 trillion in assets under management as of 2013, half of the $30 trillion in mutual fund assets worldwide. According to the Investment Company Institute, aside from mutual funds, the other funds held in retirement plans include balanced, bond, and equity funds.
Balanced Funds. Also called hybrid funds, it invests in stocks, bonds, and money market funds. Balanced funds represent 8% of assets in the defined contribution plans and IRAs. This is designed for investors aiming for safe income and modest growth.
Bond Funds. The fund, investing in bonds and other debt vehicles, represents 22% of mutual fund assets in retirement accounts. Bond funds seeks to generate income and are considered less risky than equity funds. Retired investors and the like normally set aside a higher portion of their capitals in bond funds, unlike younger ones. The Vanguard Total Bond Market Index Fund is a known bond fund seen in retirement accounts. With over $124 billion in assets, the index fund trails the Barclays U.S. Aggregate Float Adjusted Index.
Equity Mutual Funds. Being the most popular fund, equity mutual funds invest in domestic and world stocks, as well as manage or track a stock index. These funds account for 52% of mutual fund assets in retirement plans and usually focus on growth over income. Investors with long-term investment objective allocate a substantial amount of capital since they can withstand the volatility of the stock market and tolerate higher risk in the long run, especially if retirement is decades away. One of the popular equity funds is the Fidelity Contrafund, with over $76 billion in assets under management. The fund’s objective is capital appreciation, which is achieved by purchasing stocks of firms viewed as undervalued.
Target Date and Lifecycle Funds. Both are part of balanced and common mutual funds in retirement plans. Target date funds venture in a combination of asset classes, including bonds, money market funds, and stocks. But it rebalance investment portfolios based on a particular retirement target date. Normally, the funds are offered in 5-10 year intervals for investors to select a fund near the year they desire to retire.
A target date fund becomes more traditional as it nears and passes the target date. Then it rebalances its portfolio to focus more on income and less on growth. Conversely, lifecycle funds automatically rebalance its portfolio from greater risk to lower risk as an investor draws near to retirement. Around 90% of its assets are placed in retirement accounts, while 40% are in lifecycle fund assets. Fidelity Investments, T. Rowe Price Group, Inc., and Vanguard Group are some of the biggest providers of target date funds.
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