Mutual funds are the most common 401(k) investments. They appeal to a wide range of investors for several reasons: They’re diversified, they’re professionally managed, and they’re liquid, which means you can sell shares when you wish although you may have a loss if the fund has dropped in value.
Mutual funds fall into three broad categories:
- Stock mutual funds, which buy shares of stock in publicly traded corporations
- Bond mutual funds, which buy bonds issued by public corporations, by federal, state, and local governments, and by federal agencies
- Money market funds, which buy a variety of short-term investments from various sources
When you get the list of funds your 401(k) plan offers, you’ll probably see a number of stock and bond funds. There may also be one or more balanced funds, which own both stocks and bonds, and one or more index funds. Each fund has its own investment objective, management style, level of risk, and fees.
Before investing in a fund, read its prospectus. If your plan offers retail funds, you can also evaluate each fund by reading analysts’ reports and evaluations in the financial press. Retail funds are those that are available to individual investors outside a 401(k) plan. If your plan offers institutional funds, which are created for the financial institution that provides your plan, and aren’t available in the retail market, you’ll probably have to get information directly from the plan provider.
As you’re evaluating the individual funds your plan offers, you should also consider the role each will play in diversifying your overall 401(k) portfolio. That means selecting a range of funds with different objectives, styles, and risks.
| EDGAR Knows Best The Securities and Exchange Commission provides mutual fund prospectuses in their EDGAR database. Companies offering the funds may provide prospectuses on their web sites, as well. |
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