Mutual Funds for Retirement

Types of Mutual Funds

Many different types of mutual funds exist, each with their own investment objectives and of costs, which can make it challenging to select one appropriate for your retirement. Here are some common types of mutual funds:

• Specific asset-oriented funds: These can include stock and bond funds, or funds more specific to a particular investment category like company size or investment style.
• Index funds: These funds are designed to mimic the performance of a market index like the S&P 500, NASDAQ, FTSE or other indexes.
• Balanced funds: These often feature an asset allocation comprised of a mix of different types of securities.
• Income funds: This type of fund focuses on income-generating investments such as dividend-yielding stocks, bonds or other fixed income instruments.
• Specialty funds: These might focus on specific sectors, regions, or socially responsible investment strategies.

Open-Ended Funds and Closed-End Funds

There are two broad categories of mutual funds: open-ended and closed-ended. Open-ended mutual funds have no restrictions on the number of shares they can issue to investors. If demand for the fund increases, the fund will buy more of the underlying investments. The value of each share is based on the market value of the underlying assets, or net asset value (NAV).

A closed-end fund, on the other hand, has a fixed number of shares available for purchase. The NAV of closed-end funds is calculated regularly, based on the value of assets in the fund. The price it trades for on the exchange, however, is market-driven. As such, a closed-end fund can trade at a discount or a premium compared to its NAV.

Don’t Overlook Mutual Fund Fees

Different mutual funds have different costs and fees, most of which you can find in the fund’s prospectus, SAI or annual reports. Some of these fees may be paid out of the fund’s assets, which can make these fees easier to overlook.

Keep in mind fees are usually charged as a portion of the fund’s assets, which means the dollar amount of your fees can rise and fall with the market.

Here are some of the fees you should be aware of:

1. Sales commissions/loads. Loads, also known as sales charges or sales commissions, are fees you pay to your financial representative—not the mutual fund issuer—when you buy or sell fund shares. These fees are paid when you purchase or redeem fund shares. There are two main types of loads:

• Front-end loads: You pay front-end loads when you purchase shares of a fund. Oftentimes, front-end loads decrease as you invest more in the fund and may eventually go down to zero if you invest enough.
• Back-end loads: Back-end loads are paid when you sell or redeem shares of a fund. Depending on the fund, back-end loads may diminish overtime the longer you stay invested.

When you select mutual funds, you may notice funds with the same name but with different classes of shares and different prices. When and how these fees are charged depends on the share classes. A-shares typically come with front-end loads, while B-shares charge back-end loads. C-shares sales fees can vary sometimes charging small exit sales fees, which are typically waived after one year.

1. Trading costs. Similar to individual investors paying commissions when buying and selling shares, mutual funds have to pay fees to brokers when they rebalance their portfolio or liquidate assets to pay out redemptions. As a shareholder, you will have to pay your share of those fees, as well as taxes on any realized capital gains (in proportion to your holdings).
2. Expense ratios/total annual fund operating expenses. These combine all of the fund’s associated fees as a percentage of your investment —including administration fees, management fees and other recurring annual fees. A few of the more common expense ratio fees include

• Management fees. As a shareholder, you will have to pay a percentage of your total assets toward management fees. These fees pay for the management of the fund and its investments.
• 12b-1 fees. These cover distribution costs, marketing costs and sometimes shareholder services. You are charged these fees for as long as you hold the shares.

Find a Better Solution

If you are a high net worth investor, a personalized, separately managed portfolio might better meet your investment objectives. By purchasing securities directly, you have more flexibility to tailor your portfolio to your specific needs while still achieving the diversification mutual funds often provide.

With this option, you can buy and sell securities according to your tax preferences. That’s helpful because as your assets grow over the years leading up to retirement, your tax situation will likely become more complex. *It is a good idea to consult a tax professional to better understand the specifics of your situation.

What to do Next

The layered fees, diversification risks, lack of flexibility and tax implications of mutual funds in a retirement account could be eating into your future retirement income. To learn more, with one of our professionals.

*The contents of this article should not be construed as tax advice. Please contact your tax professional.