7 of the Top Mutual Funds to Look for in Your 401k

mutual funds - 7 of the Top Mutual Funds to Look for in Your 401k

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A 401k is definitely a great vehicle to achieve your retirement goals. There are lucrative tax benefits and the possibility of getting contribution matches from your employer. But a 401k can be daunting as well. There are usually a lot of mutual funds to choose from.

Then how do you pick? Some of the key factors include evaluating your goals, income requirements and tolerance for risk. The good news is that top mutual fund companies have calculators to help with this. Or you can seek the help of a financial advisor.

But when it comes to selecting mutual funds, another important key is diversification. You essentially want to have exposure to different types of asset classes, such as equities, bonds, foreign securities and so on.

And while a company’s 401k can vary greatly in the mutual funds offered, there are some that tend to be staples. So then, let’s take a look at these standouts:

  • Vanguard 500 Index Fund Investor Shares (MUTF:VFINX)
  • Dodge & Cox Stock Fund (MUTF:DODGX)
  • Vanguard International Growth Fund Investor Shares (MUTF:VWIGX)
  • Fidelity Puritan Fund (MUTF:FPURX)
  • Fidelity Contrafund Fund (MUTF:FCNTX)
  • Vanguard Inflation-Protected Securities Fund Investor Shares (MUTF:VIPSX)
  • Vanguard Total Bond Market Index Fund Admiral Shares (MUTF:VBTLX)

Mutual Funds: Vanguard 500 Index Fund Investor Shares (VFINX)

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One of the most popular mutual funds for 401ks is an index fund for the S&P 500, which tracks the largest U.S.-listed companies. This is a great way to get exposure to equities (the index represents about three-quarters of the value). Since 1976, the average return is about 11.31%.

As for one of the top S&P 500 funds, there is the Vanguard 500 Index Fund Investor Shares. It has a whopping $630 billion in assets under management.

Consider that the S&P 500 is diversified across 11 industries. Although, the information technology sector is the largest, at 27.48% of the overall index. As for the smallest, it is actually energy. It represents 2.53% of the total.

In light of this, it should be no surprise that the top holdings include Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Amazon (NASDAQ:AMZN) and Alphabet (NASDAQ:GOOGL, NASDAQ:GOOG).

A key advantage with the Vanguard 500 Index Fund Investor Shares fund is the expense ratio, which is only 0.14%, or $14 annualized on a $10,000 investment. This means more of the gains go to shareholders. While the fund is currently closed to new investors, if it opens up again, it should be at the top of your list.

Dodge & Cox Stock Fund (DODGX)

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Back during the Great Depression in the early 1930s, Van Duyn Dodge and E. Morris Cox started an investment management firm that would focus on the long-term, low valuations and strong portfolio diversification.

That strategy has definitely worked quite well. Today, there are about $327 billion in assets under management.

For the most part, the portfolio has medium-to-large companies. Some of the top holdings include Wells Fargo (NYSE:WFC), HP (NYSE:HPQ), Bank of America (NYSE:BAC) and MetLife (NYSE:MET). In fact, over 28% of the portfolio is in financial services stocks.

In terms of performance for the Dodge & Cox Stock Fund, it has been solid. During the past decade, the return was about 12%.

Vanguard International Growth Fund Investor Shares (VWIGX)

Vanguard logoDiversification should not just be for the U.S. market. It is also advisable to get exposure to foreign stocks.

Then what fund looks good? One is the Vanguard International Growth Fund Investor Shares fund, which has been around since 1981. It has a broad mandate, such as to invest in emerging and developed markets.

And yes, the strategy has worked quite well. For the past ten years, the return was 12.27%.

Currently about 15% of the portfolio is in U.S. stock. However, the companies have a high level of exposure to foreign markets.

Typically, a foreign stock fund will have high expenses because of the need for offshore offices. But Vanguard has been able to run a lean operation, as the fund’s expense ratio is 0.44%. By comparison, a typical fund will be over 1%.

Fidelity Puritan Fund (FPURX)

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A balanced fund generally has 80% of its portfolio in stocks and the remaining assets in bonds. By doing this, there are usually more stable returns.

A top balanced fund for 401ks is Fidelity Puritan Fund, which got its start in 1947. A nice twist to this fund is that it also provides exposure to foreign securities, which provides even more diversification. Since inception, the return has been about 11%.

The fund does have a large portfolio, with over 2,000 holdings. Some of the top ones are Facebook (NASDAQ:FB), Mastercard (NYSE:MA) and Qualcomm (NASDAQ:QCOM). As for the bonds, they range from federal Treasuries to mortgage-backed securities to municipals.

Fidelity Contrafund Fund (FCNTX)

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Will Danoff, who manages the Fidelity Contrafund Fund, is one of the world’s top portfolio managers. If you invested in his fund 30 years ago, a $10,000 investment would have hit $512,320 at the end of 2020. By comparison, the S&P would have returned $222,533.

The strategy for Danoff is to look at underappreciated companies that have growth potential, strong cash flow generation and competitive advantages. Some of his current top holdings are Salesforce.com (NYSE:CRM), Adobe (NASDAQ:ADBE), Netflix (NASDAQ:NFLX) and Visa (NYSE:V).

The expense ratio of 0.85% is a bit on the high side. Then again, the premium is warranted given Danoff’s investment track record.

Vanguard Inflation-Protected Securities Fund Investor Shares (VIPSX)

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Inflation has been essentially nonexistent for decades. But there are signs that it may return. The Covid-19 pandemic has resulted in rock-bottom interest rates from the Federal Reserve and multiple fiscal stimulus bills from the federal government.

If inflation does come back, it could make it difficult for stocks and bonds. But there are ways to hedge some of the impact.

One is to invest in a fund like the Vanguard Inflation-Protected Securities Fund Investor Shares. It invests in Treasury bonds that have provisions to adjust the value based on the inflation rate.

Now this is not to imply that a heavy portion of your portfolio should be invested in these securities. Rather, an allocation of 1% to 5% could be a good way to provide some protection.

Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)

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Bond funds are not particularly exciting. The returns are often moderate, at least compared to stocks. Yet bonds can be an effective way to create a robust portfolio for your 401k.

A good choice is the Vanguard Total Bond Market Index Fund Admiral, which has $305 billion in assets under management. The fund is focused on U.S. investment-grade securities in the U.S. The portfolio also spans all maturities, from short to long.

The fund sports a minimal expense ratio. It is a mere 0.05% of the total assets. And since 2001, the average return on the fund was 4.39%.

On the date of publication, Tom Taulli did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.

Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling.  He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.    

Article printed from InvestorPlace Media, https://investorplace.com/2021/03/7-of-the-top-mutual-funds-to-look-for-in-your-401k/.

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