The first quarter is often a time when investors scurry to make contributions to their retirement accounts, including 401k plans and individual retirement accounts (IRAs). Good news for investors looking to funnel more cash into their retirement plans: in 2018, the maximum 401k contribution is $18,500, up from $18,000 last year.
The IRA contribution limit is $5,500, or $6,500 for those 50 years old and older. In retirement accounts, investors can hold an array of assets, though IRAs generally offer more flexibility because investors can choose their own investments beyond what is offered in employer-sponsored plans, such as 401k plans.
Mutual funds, including passive index funds, can make for ideal investments for retirement accounts for multiple reasons, including enhanced portfolio diversification.
“Diversification is one of the primary reasons an investor would choose to invest through a mutual fund,” according to RothIRA.com. “In and of itself, a mutual fund represents a diversification because it invests in the stock of many companies or even investment classes.”
Here are some mutual funds that could be ideally suited for retirement accounts.
Mutual Funds for Retirement: Vanguard Total Bond Market Index Fund Investor Shares (VBMFX)
Expense Ratio: 0.15% per year, or $15 on a $10,000 investment
Minimum Investment: $3,000
The Vanguard Total Bond Market Index Fund Investor Shares (MUTF:VBMFX) carries a $3,000 minimum investment and is a passively managed index fund, not an actively managed mutual fund. VMFX features a quality, high-grade portfolio of about 30% investment-grade corporate bonds and 70% U.S. government debt of varying maturities.
As with other bond funds, one of the risks of the fund is that increases in interest rates may cause the price of the bonds in the portfolio to decrease—pricing the fund’s NAV lower,” according to Vanguard. “Because the fund invests in all segments and maturities of the fixed income market, investors may consider the fund their core bond holding.” VBMFX follows the tradition of low fees, as its 0.15% annual expense ratio makes this index fund 80% cheaper than the expenses of competing strategies.
Mutual Funds for Retirement: Schwab U.S. Large-Cap Value Index Fund (SWLVX)
Total Operating Expenses: 0.04%
With value stocks expected to rebound this year, prescient investors may want to have a look at the Schwab U.S. Large-Cap Value Index Fund (MUTF:SWLVX). This Schwab index fund happens to be the cheapest value fund on the market, making it an ideal option for retirement accounts.
SWLVX allocates over 20% of its weight to financial services stocks, a common hallmark among value funds because that sector is widely viewed as a value play.
Interestingly, SWLVX’s second-largest sector weight is 16.6% to technology, indicating large- and mega-cap technology stocks may not be as richly valued as some investors are being led to believe.
Mutual Funds for Retirement: Dodge & Cox Balanced Fund (DODBX)
Minimum Initial Investment: $2,500
As a balanced mutual fund, the Dodge & Cox Balanced Fund (MUTF:DODBX), one of the oldest such funds on the market, mixes equities and fixed-income assets. This mutual fund can allocate between 25% and 75% of its assets to stocks with a maximum of 20% available to be allocated to fixed-income assets.
“Debt securities in which the Fund may invest include investment-grade securities such as government and government-related obligations, mortgage- and asset-backed securities, corporate and municipal bonds, and other debt securities and may include fixed and floating rate instruments,” according to the issuer.
A $10,000 investment in DODBX 10 years ago would be worth over $22,000 today, according to Morningstar data.
Mutual Funds for Retirement: Vanguard High Dividend Yield Index Fund Investor Shares (VHDYX)
Expense Ratio: 0.15%
Minimum investment: $3,000
Dividends are integral part of long-term total returns and therefore must be included in well-balanced retirement accounts. The Vanguard High Dividend Yield Index Fund Investor Shares (MUTF:VHDYX), which requires a minimum investment of $3,000, features of basket of U.S.-based companies sporting larger-than-average dividends.
This index fund holds nearly 400 stocks, led by a 15.4% weight to the technology sector. Financial services is the second-largest sector allocation at 14%, giving VHDYX somewhat of a value feel.
At the end of 2017, VHDYX’s top 10 holdings combined for just under 31% of the fund’s weight. That group includes Microsoft Corporation (NASDAQ:MSFT), Johnson & Johnson (NYSE:JNJ) and Intel Corporation (NASDAQ:INTC).
Mutual Funds for Retirement: American Funds New Perspective Fund (NPFFX)
Expense ratio: 0.84%
Minimum Investment: $250
This is the F-1 share class of the American Funds New Perspective Fund (MUTF:NPFFX), meaning interested investors would have to allocate to this fund via an IRA because this share class is not available in employer-sponsored plans.
This mutual fund “diversifies among blue chip companies in the United States and abroad, emphasizing multinational or global companies and focusing on opportunities generated by changes in global trade patterns and economic and political relationships,” according to the issuer.
Currently, NPFFX is nearly evenly split between domestic and international equities, most of which are large-caps. In 2017, this mutual fund had portfolio turnover of 28%. The fund carries a five-star Morningstar rating.
Mutual Funds for Retirement: Vanguard Equity Income Fund Investor Shares (VEIPX)
Expense ratio: 0.26%
Minimum Investment: $3,000
The Vanguard Equity Income Fund Investor Shares (MUTF:VEIPX) requires a minimum investment of $3,000. This index is a different beast than the previously mentioned Vanguard dividend fund.
VEIPX’s “emphasis on slower-growing, higher-yielding companies can also mean that its total return may not be as strong in a significant bull market. This income-focused fund may be appropriate for investors who have a long-term investment goal and a tolerance for stock market volatility,” according to Vanguard.
Indeed, VEIPX is something of low-volatility play as the consumer staples, telecom and utilities sectors combine for over 23% of the fund’s weight. Financials and technology stocks combine for almost a third of this Vanguard fund’s roster.
Mutual Funds for Retirement: Fidelity Capital & Income Fund (FAGIX)
Expense ratio: 0.73%
Minimum Investment: $2,500
The Fidelity Capital & Income Fund (MUTF:FAGIX) has a minimum investment requirement of $2,500. FAGIX holds stocks and bonds, focusing on junk-rated corporate bonds. Hence, this mutual fund sports a tempting 30-day SEC yield of 3.6%. FAGIX has a duration of almost 3.4 years.
Although it blends stocks and junk bonds, FAGIX is considered a moderate risk fund, making it appropriate for some investors planning for retirement. Last year, this mutual fund had a portfolio turnover rate of 34%, but its expenses were toward the lower end of the category average.
FAGIX has a five-star Morningstar rating.
As of this writing, Todd Shriber does not own any of the aforementioned securities.