Best Mutual Funds for IRAs

Regardless of your station in life, earning, saving and investing is an inevitable monthly or everyday lifecycle. Although savings is an excellent approach to financial improvement, investing takes center stage when it comes to multiplying wealth and maintaining financial stability. 

Unlike other forms of investment, retirement investing is a long-term approach. This makes sense because it’s geared toward guaranteeing you financial stability at retirement. It is, therefore, vital that you invest in assets that strongly reflect this sentiment. 

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The tax-advantaged individual retirement accounts (IRAs) support a wide variety of investment options, including stocks, mutual funds, exchange-traded funds (ETFs), bonds, dividends, real estate and many more. And each of these investment options highlights different investment strategies. The implication is that to grow your IRA meaningfully, the investment strategy you adopt must match your choice of investment assets.  

Suppose you want to build a diversified portfolio of stocks, bonds and other securities while delegating management. In that case, mutual funds are your best option. A mutual fund is a type of investment vehicle that allows you to invest in a diverse range of professionally managed financial securities with little capital. As a hands-off investor, mutual funds offer you a great way to spread investment risk exposure and diversify investment portfolios to accommodate assets within and outside the U.S.

However, with over 7,000 mutual funds available, picking the best out of the pack can be challenging. Nevertheless, there are several active mutual funds whose managers have consistently beat performance benchmarks and delivered enviable results at moderate expenses.  

If you’re researching the best mutual funds to choose for your IRA, then you’re in the right place. Benzinga has compiled some of the best active mutual funds for your IRA across different categories.

Best Overall: Fidelity U.S Bond Index (NASDAQ: FXNAX)

Pros

  • Very low volatility
  • No minimum investment requirement
  • Open to new investors

Con

  • Relatively low growth potential

The Fidelity U.S Bond Index (NASDAQ: FXNAX) is undoubtedly the best overall mutual fund for your IRA. The mutual fund checks all the boxes, from robust liquidity to low volatility and zero account fees. While you might have to worry about its relatively lower growth potential, the long-term investment term of your IRA makes up for that. Plus, it’s excellent for a solid portfolio diversification strategy.

FXNAX is owned by Fidelity and tracks the Bloomberg Barclays U.S. Aggregate Bond Index. The index grants investors exposure to the U.S. investment-grade bond market. Most of the fund’s underlying assets (over 80%) are securities. FXNAX holds about 8,317 underlying assets. Some of the top-weighted assets include U.S. Treasury accounts (40.21%), U.S. Agency debts (1.09%), corporate bonds (24.79%) and MBS pass-through mortgage-backed securities (27.26%).

Best for Stocks: Fidelity® ZERO Total Market Index (MUTF: FZROX)

Pros

  • Lowest account fees in the stock index funds category
  • Tracks the entire equity market
  • Exposure to diversified asset class

Con

  • Relatively higher volatility

The Fidelity® ZERO Total Market Index (MUTF: FZROX) is a Fidelity-owned mutual fund that tracks the entire U.S. equity market. The fund’s significantly lower account fees and minimum investment requirement qualify it as the best stock mutual fund for your IRA.

FZROX is a total market fund. It exposes your portfolio to the entire U.S. equity market, including small-, mid- and large-cap stocks. When investing in FZROX, you can expect higher-than-average returns. The reason is that exposure to small- mid- and large-cap stocks introduces more diversification to your IRA portfolio. The implication is that other uncorrelated instruments in the mix offset the high volatility of riskier assets. Therefore, each asset maintains optimum return long term.

Among the fund’s roughly 2,633 holdings,  Apple Inc. (NASDAQ: AAPL) makes up 5.87%. Other major tech corporations in the top five are Microsoft Corp. (NASDAQ: MSFT), Amazon.com Inc. (NASDAQ: AMZN), Tesla Inc. (NASDAQ: TSLA), and Alphabet Inc. (NASDAQ: GOOGL). 

Aside from information technology (24.44%), the assets cut across other vital sectors, some of which include healthcare (13.88%), finance (13.23%), consumer cyclical (11.28%) and industrial (8.91%). Large-cap stocks make up roughly 90% of the fund’s underlying assets. Mid-cap stocks occupy 8%, and the remaining 2% of the assets are either micro- or small-cap stocks. 

Best for International Stocks: Fidelity ZERO International Index (MUTF: FZILX)

Pros

  • $0 expense ratio
  • Open to new investors
  • Exposure to non-U.S. stocks

Con

  • Exposure to currency risk

Fidelity ZERO International Index (MUTF: FZILX) is a global investment mutual fund. FZILX tracks the performance of foreign developed and emerging stock markets. The fund invests over 80% of its asset holdings in securities that are part of the Fidelity Global ex U.S. Index Fund (NASDAQ: FSGGX) and its associate depositary receipts. 

FZILX exposes investors to non-U.S. stocks, including large- and mid-cap stocks. The fund holds about 2,390 assets. These assets cut across various sectors, including financials (19.94%), industrials (12.70%), information technology (11.69%), consumer discretionary (10.26%) and healthcare (9.73%) as the top five. Some of the top companies tracked by the fund are Fidelity Revere Street Trust (NASDAQ: FSRRX?), MSCI EAFE Index Future June 22 (??????), Nestle SA (OTCMKTS: NSRGY), Taiwan Semiconductor Manufacturing Co. Ltd. (NYSE: TSM) and Tencent Holdings Ltd. (OTC: TCEHY)

FZILX provides a significant degree of diversification for your IRA portfolio. Additionally, the fund insulates your portfolio from the risk, volatility or market fluctuations that sometimes characterize U.S.-based stocks. Japan-based equities comprise 16% of the fund and are the highest. In descending order of stock composition, others include the United Kingdom, Canada, China, France, Switzerland and Germany.

Best for Real Estate: Fidelity® Real Estate Index Fund (NASDAQ: FSRNX)

Pros

  • Exposure to real estate investment trusts (REITs)
  • Relatively low expense ratio

Con

  • Relatively higher volatility

FSRNX seeks to provide returns on investment equivalent to the total return of equity REITs and other real estate-related investments. If you want to diversify your portfolio outside traditional investment options, consider REITs. REITs are originally tax inefficient. So by holding the asset class tax-advantaged IRA, you eliminate the tax inefficiency and enjoy the full extent of the investment benefits.

FSRNX invests roughly 80% of its asset holdings in securities included in the MSCI US IMI Real Estate 25/25 Index. The fund holds about 165 real estate assets. These real estate assets cut across infrastructure (15%), industrial (12.71%), apartments (10.67%), healthcare (7.91%) and other sectors.

Best for Target-date Retirement Funds: Vanguard Target Retirement 2060 Fund (NASDAQ: VTTSX)

Pros

  • Exposure to domestic and international bonds 
  • Hassle-free investment approach with professional management 
  • Low maintenance 

Cons

  • Relatively higher minimum investment amount
  • Relatively high expense ratio

Target date funds are fund mixtures (stocks, bonds, ETFs and mutual funds) that allow you to match your investment strategy to a date at which you currently plan to retire. It leverages the “glide-path” model to move your fund from a riskier to a safer investment in small time increments, thereby adjusting your investment mixture to yield optimum returns in anticipation of your expected retirement date. Each of these funds has a year suffix that suggests the investment strategy used in managing its underlying assets. When investing in a target fund, you’ll have to choose one with a date that’s close to the year you plan to retire.

Although Benzinga picked VTTSX for this list, Vanguard’s target-date funds are all good options. VTTSX combines a diversified portfolio with an underlying asset composition that changes over time. The funds are designed to reflect the investment strategy that advises higher-risk, higher-reward investments for young portfolios. And then gradually shifts into a more conservative portfolio as the portfolio nears retirement.

VTTSX portfolio has an approximate 89/10/1 split between equities, bonds and short-term reserves. So as 2060 (target retirement year) approaches, the percentage of assets allocated to the equity mix will decrease while that of bonds will increase. 

Best for Growth Investment: Vanguard Explorer Fund Investor Class (NASDAQ: VEXPX)

Pros

  • Exposure to small- and mid-cap high-growth potential stocks
  • Long history of good performance

Cons

  • High expense ratio
  • Relatively higher short-term volatility

VEXPX is an actively managed mutual fund that mainly tracks small- and mid-cap stocks of businesses with high growth potential. While small- and mid-cap stocks could mean exposure to higher volatility than large-cap stocks, the fund’s higher long-term potential return more than makes up for this drawback. VEXPX is a good way for IRA investors to diversify their long-term IRA portfolios.

The fund offers investors exposure to stocks of roughly 732 small- and mid-sized company assets. These assets cut across various sectors, including information technology (21.6%), industrials (20.6%), health care (20.10%), consumer discretionary (11.70%) and financials (9.20%) among the key sectors. The top five company holdings are ICON plc (NASDAQ: ICLR), Performance Food Group Co. (NYSE: PFGC), Five9 Inc. (NASDAQ: FIVN), LPL Financial Holdings Inc. (NASDAQ: LPLS) and Molina Healthcare Inc. (NYSE: MOH) in descending order of composition. These companies tend to be relatively unseasoned and provide little or no dividend yield. Nevertheless, they’re considered to have superior growth potential. 

Features to Look for in Mutual Funds for IRA

Before choosing a mutual fund for your IRA, certain specific features need consideration. By looking out for such features, you have a high probability of picking a mutual fund for your IRA that’ll outperform the pack. Some of these features are:

Low expense ratio

A mutual fund’s expense ratio is the fee that the fund’s manager charges for controlling and overseeing the investment fund. The expense ratio is possibly the most significant feature to consider because it can impact your profit significantly. Like some of Benzinga’s picks, mutual funds with a zero expense ratio are your best option. However, if you can’t find any with a zero expense ratio when carrying out your research, look for funds with moderate to low expense ratios. A lower expense ratio means you keep more of your money. The lower, the better.

Fund’s age

The fund’s age is another vital feature worthy of consideration before making a choice. An older mutual fund would have proven its worth and will have a track record you can cross reference. Although newly established funds could be good for your IRA, it’s best to opt for older funds to be on the safer side.

Diversified assets mix

It would help to consider the mutual fund’s underlying assets mix. Your chosen mutual fund must provide exposure to a diversified asset class across different companies, sectors and industries. This helps reduce your IRA’s risk exposure. Usually, the higher the fund’s diversification, the less exposed your IRA portfolio is to investment risk factors.

Management team

The fund’s manager or management team’s efficiency is also vital. Thanks to technology, you can now easily access requisite information about your potential portfolio manager or management team. A manager without any significant track record or history of massive losses, even during peak stock performance, is a recipe for disaster. A management firm comprising at least one expert investment analyst or portfolio czar is highly likely to deliver market-crushing returns. When team members from such firms have their net worth also invested in your chosen portfolio, you can go home knowing that your portfolio is in the right hands.

How to Buy Into a Mutual Fund for your IRA

Now that you’ve learned some features to consider before choosing a mutual fund for your retirement account, it’s time to invest. Here are some steps that’ll help you buy your first mutual funds.

Decide your budget

Like all successful financial endeavors, you need to start with budgeting. You don’t want  to put all your money into a retirement account, unless you don’t have other financial responsibilities. It’s always good to put money into other potential investment options. Clear-cut budgeting will clarify the amount of money you have available for investment, savings and day-to-day financial responsibilities. You can decide how much goes into mutual funds from your IRS investment capital. 

Pick a brokerage

Once you’ve decided on a funding budget, the next step is to pick a broker or suitable financial institution to open an account. However, you’ll have to do some background research before you pick a broker. Does the broker offer a retirement investment account? How much does the broker charge for account fees compared to others? Does the broker have a track record of delivering returns? These questions can guide you in choosing a better broker for your IRA investments.

Open a brokerage account

Once you find a brokerage that ticks all your boxes, open your brokerage account.  

You can do this by visiting your chosen brokerage’s website and signing up for a new account. Follow the instructions stipulated by the broker to complete the account registration and verification. Also, fund the brokerage by linking your payment account directly or any other way specified by your broker.

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Choose your mutual funds

At this point, it’s assumed that you’ve done your due diligence and know the best mutual funds to yield the best returns over time. Some brokers will also recommend funds they believe will perform well long term for you. Either way, because you’re investing toward retirement, you should consider diversifying your mutual funds portfolio as much as possible. Combining the best mutual funds in stocks, bonds, REITs and others is the best approach. Take note of the requisite funds and head to the buy page.

Buy the mutual funds

Next, you’ll want to use the brokerage’s research tool to locate the mutual funds you want to buy. Then, enter the number of funds you wish to buy. Finally, you’ll be required to confirm your buy order. Once you confirm, the broker will purchase the mutual funds you’ve chosen at the end of the trading day.

How You Can Improve Your Finances

Improving your finances is a recipe for living your best life. Here are some approaches that’ll help you improve your finances.

Saving

Accumulating a healthy savings account is one effective strategy for improving your personal finance, especially in today’s uncertain and inflation-riddled economy. Aside from economic uncertainties, life is uncertain, and you never know when you might need cash. 

Job loss, accidents, car break downs, disability, sick child or pet are some issues that may necessitate having an emergency fund. Savings provides a backstop for such uncertainties, increasing your feeling of security. Furthermore, the money you accrued through savings can serve as your seed capital for higher-yielding investments like stocks, bonds, ETFs and mutual funds. To start, you can open an interest-advantage savings account and contribute regularly. Your contributions don’t have to be much, just regular. Over time it’ll grow into a sizable fortune.

Budgeting

Regardless of how much or little your paycheck is, a budget can help you make the best out of it. A budget allows you to prioritize essential spending. It tallies your income against your expenses to highlight and shows you how much you could save or repurpose off discretionary and nonessential expenses. Budgeting is a solid first step if you want to change your financial future.

Investing

Every month or week you receive that paycheck, make a habit of investing some of it. You don’t have to earn a windfall to invest. It all boils down to efficient budgeting. When you budget well, you can easily free up extra cash you can use for investing.

Thankfully, there are numerous investment options like stocks, bonds, ETFs, mutual funds, cryptocurrency and the foreign exchange market, which you can leverage. All have unique features. Although investing means taking on a certain amount of risk, consistently spreading your capital in the right proportion across diverse asset classes can help grow your return on investment (ROI) and reduce your risk exposure.

Both investing and savings are geared toward improving your personal finances. However, while savings takes a more passive, zero-risk approach and generates little or no ROI, investing, in contrast, takes a more active approach with a potential for high ROI. 

Frequently Asked Questions

Q

Can I invest my Roth individual retirement account (Roth IRA) in mutual funds?

A

Yes. For Roth individual retirement accounts, mutual funds are an excellent investing alternative (Roth IRAs).

Q

How do mutual funds work?

A

Mutual funds are asset mixtures (stocks, bonds and ETFs)  that you can buy as a single entity. When you purchase a mutual fund, you buy into each of the individual funds. In other words, your portfolio is diversified. When either of the individual assets making up your mutual fund is performing poorly or experiencing high volatility, it is cushioned by other uncorrelated assets. This ensures you earn optimum returns over time.

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