Mutual funds are the bread and butter of nearly every investor’s retirement account — and for good reason. Through an active portfolio management style, these investment vehicles provide investors with professional expertise in the asset selection process. This tends to make mutual funds less volatile than broader stock indices, on average. It can also lead to consistent outperformance of these indices with the right portfolio management team. However, you have to take into account the expenses of mutual funds, which are generally higher than those of index funds.
Each mutual fund is a breadbasket of individual holdings, which means investors can achieve diversification with just a few mutual funds, or even just one. The plethora of fund types and asset classes means investors have plenty of options as to what to choose. For retirement account purposes, you’ll want to make sure you have the right mix of stocks and bonds, which can be achieved with a single mutual fund in some cases.
Management teams tend to be one of the most important factors when choosing a fund. Some mutual funds have a long track record of consistently outperforming, while others continually lag.
Investors who seek higher returns in their retirement accounts but still need risk management techniques may prefer mutual funds.