Mutual fund

A mutual fund is a professionally managed portfolio of investments selected by an investment company registered with the U.S. Securities and Exchange Commission (SEC).

What is a mutual fund?

A mutual fund is an investment product designed to pool money from many individual investors. This collective capital is then used to purchase a diversified¹ portfolio of securities, which can include stocks, bonds, money market instruments, or other assets. 

These diverse investments are professionally managed by an investment company. This company is legally obligated to be registered with the SEC, which requires them to adhere to strict regulations for investor protection. The idea is that by combining resources, investors can gain access to a more diversified, professionally managed portfolio than they could typically build, manage, and have access to on their own.

How do mutual funds work in a 401(k)?

In the context of a 401(k) plan, mutual funds are often the primary investment option. When you elect to contribute a portion of your paycheck to your 401(k), you typically choose how to allocate those contributions across a menu of mutual funds chosen by your employer. Each fund within this lineup offers a distinct investment strategy, focusing on various asset classes (like U.S. stocks, international bonds, or real estate) or risk levels (from conservative to aggressive). Your contributions purchase shares in these mutual funds, and their collective performance directly determines the growth and value of your retirement account over time.

Why are mutual funds a common choice for retirement savings?

Mutual funds are a prevalent and often recommended investment choice for retirement savings, particularly within 401(k) plans, due to several key advantages. 

• Mutual funds have a capacity for automatic, broad diversification, making it easier for investors to achieve a well-rounded portfolio without needing to select individual securities. 

• Investing in a single mutual fund means your money is immediately allocated across numerous underlying investments, which helps to mitigate risk compared to investing in just one or two individual stocks or bonds. 

• Experienced fund managers handle the complex decisions of buying, selling, and monitoring the underlying securities on your behalf, saving you time and effort.

• Mutual funds provide convenient access to a wide variety of asset classes and risk levels, helping you to confidently build an investment portfolio tailored to your financial objectives and risk tolerance within one accessible investment product.

1. Diversification does not ensure a profit or protect against loss.

Investing involves risk, including risk of loss. Past performance does not guarantee future results.