What are Mutual Funds and how are they used in Retirement Planning?


Mutual funds are by far some of the most popular investment options for working toward your financial goals. They provide various kinds of investment opportunities to choose from. Many people don’t really understand what mutual funds are and those that do might wonder how to leverage them to preserve and work toward increasing their wealth. In this article, we are going to delve into mutual funds and show you ways in which you can use them for your retirement planning.

Mutual Funds for Retirement Planning

What are Mutual Funds?
As the name suggests, a mutual fund refers to a shared fund where the investors’ money is pooled together and the total amount subsequently invested in a variety of vehicles. These can include stocks, indices, bonds and various other assets or securities. Sometimes, the mutual fund can be invested in a combination of all these. The mutual fund investments are carried out based on the objectives that have been defined in the offer document. For example, if the fund is equity-oriented, then most of its funds will be invested in stocks.

How Mutual Funds Work
Think of a mutual fund as a trust or an “endowment” that pools savings from investors pursuing a similar goal and invests it with a goal of earning profits. The fund then redistributes the dividends earned from the investment among investors. The company managing the mutual fund will charge a small fee for managing and investing your money.
Investing in mutual funds generally streamlines the investment process and saves you a lot of time. Instead of pouring over financial and market reports and agonizing on which asset classes to put your money into, you simply entrust your money to professional asset managers who will channel your money to the investments that sync with your overall risk tolerance and goals.

The Main Types of Mutual Funds
Just like other financial instruments, mutual funds are highly differentiated. There is a vast array of funds that you can choose to invest with. Your investment goals or objectives are helpful in determining your choice of fund. For example, are you looking for a short-term or long-term investment? The degree of risk also varies depending on the type of mutual fund chosen. Here is a look at the main types of mutual funds:

  • Money Market Funds: Money market funds generally provide a low risk. They refer to fixed and short-term securities like treasury bills, certificates of deposit (CD’s) or government bonds.
  • Equity Funds: These mutual funds invest in stocks or equities. They are generally higher risk investments as they aim at growing your money at a faster rate using money markets. Equity funds are even further differentiated. There are those specializing primarily on income funds, growth stocks, large-cap stocks, small cap stocks, mid-cap stocks and value stocks. The equity fund could also invest in a combination of all these.
  • Balanced Funds: Balanced funds offer investors a mix of fixed income securities and equities. Mutual fund managers will try and achieve a balance that gives you the best returns. Typically, the money will be divided into various kinds of investments to reduce the risk of losing your money. Balanced funds are less risky than equity funds although they still carry a degree of risk depending on their approach. The more aggressive balanced funds will put more money in equities while less aggressive ones will focus more on bonds but with the trade-off of a lower rate of return.
  • Index Funds: Index funds are another financial instrument that is widely deployed by mutual funds. The indices track the value of an index such as the S&P. The value the mutual fund invests in the index goes up or down as the index fluctuates up or down.
  • Fixed Income Funds: In fixed income funds, the mutual funds purchase investments with a fixed rate of return. Examples of these include high-yield corporate bonds. The advantage of Fixed Income Funds is that the fund can earn money on a regular basis but they still carry a degree of risk, especially high-yield corporate bonds.

How are Mutual Funds Used in Retirement Investments?
People go into retirement with different goals and experiences and their investments also reflect individual choices. There are a variety of factors to consider when planning retirement.

  • What will your retirement life be like?
  • Are you planning to work or run a business in your retirement?
  • What will be your income needs?
  • What will be your health condition?
  • How much income do you expect to earn and live on during your retirement?

Retirement investing can be a delicate balancing act. It’s important to choose mutual funds that aren’t too risky but which can keep pace with the rate of inflation.  Some mutual funds do the heavy lifting for you. They are fashioned as retirement mutual funds and are designed specifically for retirees. The fundamental objective of a retirement mutual fund is the preservation of your assets, your income, and growth. They are designed to achieve positive returns at the inflation rate or above the inflation rate and minimize risk as much possible. They also aim to grow your assets while minimizing risk. The risk profile for retirement mutual funds is generally moderate to conservative. Some types of mutual fund investments that can be suited for a typical retiree might include:

  • Balance Funds
  • Fixed Income Funds
  • Money Market Funds
  • Dividend-Paying Stock Market Funds

Building Your Mutual Fund Retirement Portfolio
A professional fund manager can help you create a variety of investments that you are comfortable with at any stage of life.. Finding the right fund manager might be as simple as asking around, or, you can simply contact us for more information.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Investing in mutual funds involves risk, including possible loss of principal.

An increase in interest rates may cause the price of bonds and bond mutual funds to decline.

Value will fluctuate with market conditions and may not achieve its investment objective.

The fund’s concentrated holdings will subject it to greater volatility than a fund that invests more broadly.

Upon redemption, the value of fund shares may be worth more or less than their original cost.