How to Invest for Retirement With Mutual Funds

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Last Updated on: 16th September 2021, 07:00 pm

There are many reasons why a savvy investor should look to mutual funds to supplement their portfolio. However, retirement-oriented investors are primed to benefit the most from these alternative investment funds.

In 2018, mutual funds constituted half of all financial assets held in individual retirement accounts and tax-qualified retirement plans such as 401(k)s. There’s a good reason why—they can make your hard-earned money last longer, and minimize the risk of losses.

Interested in finding the best mutual funds for retirement? In this article, we’ll go over why you should invest in mutual funds as well as which fund is best suited for your personal risk tolerance and time horizon. 

Mutual Funds 101

Mutual funds are a type of investment fund in which money is pooled between various investors to buy securities, mostly in the form of stock. At a greater economy of scale, a professionally-managed mutual fund will generate returns via broad market exposure and varied industrial and sectoral diversification.

Small-scale investors have a lot to gain by pooling their funds with larger investors. Ideally, investors with the analytical skills and market expertise to manage the portfolio’s allocation and minimize risk. Here lies the benefit of mutual funds—empowering smaller investors to purchase a wider and more diverse mix of well-managed investments than they could otherwise afford.

Why Invest in Mutual Funds?

Mutual funds have a lot to offer seasoned investors and market entrants alike. Below, we’ve listed some of the main reasons why you should invest for retirement with mutual funds.

Simplicity

For a mutual fund to be successful, it must be well-managed. Therein lies the beauty of mutual funds—they allow individual investors to take the back seat while professional portfolio managers handle investment decisions. In other words, they require no advance knowledge of markets or economics. Mutual funds can also be included in your 401(k) plan or annuity sub-accounts. 

Diversification

Mutual funds often invest in hundreds, if not thousands, of different securities across a broad spectrum of industries. Therefore, investors can hit their diversification targets without having to invest in multiple funds.

Low Minimums

Unlike hedge funds, index funds, or other investment funds, mutual funds often have low minimum initial investment requirements. Although you can find funds without any initial minimum requirement at all, most mutual funds have an initial investment floor between $500 and $5,000. 

5 Things to Consider First

Not so fast. Before you pick up the phone and speak to your financial advisor, there are a handful of considerations you should first address. We’ve listed them below.

• Select whether you want to take an active or passive management approach.
• Settle on a budget and minimum initial investment amount
• Choose between online brokerage, traditional brokerage account, or buy from the fund
• Calculate how management fees will affect your returns
• Remember that past performance is no guarantee of future growth

Once the above prerequisites are met, you can move forward with confidence knowing that you have a general investment strategy for retirement. At this point, you can proceed to the most important stage of your mutual fund investment journey—picking the right investment provider.

Getting Started: Choosing Your Provider

If you’re at a loss for where to start, here’s a comprehensive list of some of the top companies that sell and manage mutual funds (listed from highest to lowest AUM). Here you will notice that the top funds, such as Black Rock, Vanguard, and Fidelity Investments manage assets valued in the trillions. Clearly, then, there’s some merit to their strategy. 

Mutual funds aren’t bought and sold like stocks. Rather, investors approach the investment funds themselves and inquire about purchasing access to their services directly.

Pay Attention to Fees

Paying sky-high management fees or trading fees can get in the way of your retirement goals. That’s why it’s crucial that investors be wary of mutual funds that charge high fees. However, not all fees are created equal. 

• Loads: A “load” is an industry term for a sales commission. So-called “no-fee” funds often come with loads, which merely disguise the fee under a different name.

• Trading fees: Brokerages and online trading platforms often charge a flat one-time trading fee charged to the investor when they first buy into a mutual fund.

• MERs: Management Expense Ratios (MERs) are percentages (usually 1-2 percent) that are shaved off the fund’s annual value regardless of its performance.

Check Morningstar Ratings

Want a closer look at how well certain investment funds manage market risk? Look for each fund’s rating from Morningstar Inc., a reputed mutual fund rating firm. You can visit Morningstar’s website to get a closer look at well any individual mutual fund performs.

To help you navigate the straits of mutual fund investing, Morningstar’s Star Rating System ranks mutual funds on a five-star rating scale based on objective, mathematical criteria.

Hedge Your Investment Strategy

Mutual funds do not accrue value in perpetuity. In a declining stock market, mutual funds lose their value. This is why it’s essential that you diversify your portfolio and invest in alternative assets such as gold, bitcoin, and cryptocurrencies IRAs.

The value of gold and cryptocurrencies are untethered to stock market performance, which makes them a safe-haven during times of economic crisis. Precious metals and cryptocurrencies are scarce resources that tend to perform well during downturns in the economy—for this reason, they are a risk-minimizing hedge against a volatile stock and bond market. 

Ensure that you allocate a share of your portfolio to alternative assets to safeguard your wealth during the next recession.

The Bottom Line

Investing in mutual funds for retirement is an excellent, low-cost method of diversifying across stocks and bonds in a relatively safe, professionally-managed fund. 

Be sure to exercise due diligence by carefully considering various investment providers and their systemic risk ratings before taking the plunge, and to hedge against risk by supplementing your investments with alternative asset acquisitions such as gold and bitcoin.

The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.