Benefits of Mutual Funds
By the time many people reach the age of 30, they have either started investing for retirement or are seriously thinking about it. There is no one-size-fits-all investment strategy for anyone, but there is no doubt that mutual funds are one of the best investment types for savers of all kinds. Here are some of the reasons mutual funds can be best for middle-aged investors:
Simplicity: Investors in their 30s and 40s typically don’t have large nest eggs or complex financial needs yet. They may be too busy to learn more about investing. Follow the KISS rule: Keep It Simple, Stupid! Diversification: Mutual funds hold dozens or hundreds of securities, such as stocks and bonds. You can get started with one fund or easily build a diversified portfolio with just a few funds. Accessibility: There is very little money or financial skill needed to buy mutual funds. You can find low-cost funds and start investing for as little as the cost of a share. These funds don’t require a broker or advisor to buy. All you need are money and a few minutes to open an account.
Mutual funds are not just for people starting to get serious about investing, They are also used by professional money managers and expert investors around the world.
Best Fund Types
People in their 30s and 40s still have at least 20 to 30 years before retiring, so they are long-term investors. All investors should be aware of their own investment goals and risk tolerance, but the longer you have until you need your money, the more aggressively you can invest. You have time to rebound from losses. Here are the basic types of funds that middle-aged investors are wise to consider:
Target Date Funds
These funds invest in a mix of stocks, bonds, and cash. They change their asset allocation as they get closer to the target dates. When the target date nears, the fund manager will decrease market risk by shifting assets out of stocks and into bonds and cash, which is what an individual investor would do. Target date mutual funds are a type of “set it and forget it” investment. Suppose you think you may retire in 25 years. One good choice for you might be Vanguard Target Retirement 2045 (VTIVX).
Balanced Funds
Also called “hybrid funds” or “asset allocation funds,” these are mutual funds that invest in a balance of stocks, bonds, and cash. The allocation usually remains fixed and invests according to a stated investment objective or style. For instance, Fidelity Balanced Fund (FBALX) has an asset allocation of about 68% stocks, 30% bonds, and 2% cash. This is considered a medium-risk or moderate portfolio.
S&P 500 Index Funds
Index funds can be great places to begin building a portfolio of mutual funds, because most of them have the lowest expense ratios. They give you lots of stocks in many industries in just one fund, which helps you quickly develop a low-cost, diversified mutual fund. S&P 500 index funds follow the 500 largest public companies in the U.S.
Sector Funds
For those middle-aged investors with relatively large nest eggs—such as $1,000,000 or more—a fully diversified portfolio might consist of a few broadly diversified index funds. It’s worth thinking about adding sector funds to the mix. They focus on industrial sectors of the economy, such as healthcare, technology, or utilities. When investing in sectors, you don’t want to allocate too much to one sector. Use two or three sector funds, and allocate around 5% of your portfolio to them.
Where to Buy Mutual Funds
You can buy mutual funds from virtually any fund company or brokerage firm that offers them. You can use a no-load mutual fund company that does not charge commissions. Consider mutual fund companies that have a wide range of mutual fund categories and types. You will need to keep building your portfolio for diversification. Some of the best no-load mutual fund companies are Vanguard Investments, Fidelity, and T. Rowe Price. The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.
