Are Mutual Funds a Good Retirement Plan?

Are Mutual Funds a Good Retirement Plan?

A solid retirement plan should have a mixture of investment options working for you, but knowing which ones are best can be confusing.

One of the most common choices for investments in retirement plans are mutual funds and this is due to their low cost, low effort, and low-risk approach.

So, is a mutual fund a good idea for your retirement plan?

The short answer is yes, and most people who already have an employer-sponsored retirement plan like a 401k will probably already find that they’re invested in a mutual fund this way. For others, mutual funds are a safe way to grow your money over the years and they come with advantages that make them ideal for retirees.

Although simple compared to other investment options, learning the basics of mutual funds still takes some time.

We’re going to look at this investment vehicle to find out its benefits, how it works for retirement plans, and what some of the best mutual funds are to choose as part of your retirement investment portfolio.

What Is a Mutual Fund?

Mutual Funds

A mutual fund is a type of investment option that features a mixture of different securities like bonds, stocks, assets, and money market instruments.

The money used for these investments is collected from a large group of people who share in the profits and losses of the fund.

A money manager is responsible for operating the mutual fund and they use this control to allocate assets and make investment choices on behalf of the entire fund.

Each fund comes with its own prospectus that details the investment objectives it has, and the entire portfolio is run to this standard.

These funds gather their money for investments by the people within them and then use that money to buy more securities.

Depending on its performance, the price of a unit or share in one of these funds can differ significantly.

When you invest in a share, you own a part of the entire portfolio which means you own its successes and failures as well.

A mutual fund is a way for people to diversify their investments with a range of equities, securities, and bonds.

Because the fund is shared with a group of people it’s cheaper to invest in but also means the returns are shared.

People use a mutual fund because it spreads their investments over the entire market so although the returns may be lower, it’s less risky than choosing just one investment vehicle to put all of their money into.

Are Mutual Funds Safe for Retirement?

Retirement Mutual Fund

A mutual fund is a safe choice for retirement and one that many people rely on as part of their retirement savings plan.

If you take a look at any standard employer-sponsored retirement plan, like a 401k, you’ll likely find that mutual funds are a common choice for investment options.

Unlike a 401k or IRA though, a mutual fund is not used specifically as a retirement account, even though you may be given the option to invest in one as part of your plan.

When entered into on their own, they don’t come with the standard tax benefits or employer sponsorship that these other plans do, and anything you earn from them will be subject to tax.

However, having an investment in a mutual fund is a smart option for retirement when used as part of a larger plan and portfolio.

Mutual funds are better suited to those with a long time until retirement because they operate best in the long term, so if you’re nearing closer to retirement age it might not be an ideal option to get started in.

What Is the Advantage of Mutual Funds?

Mutual Funds Advantages

Most people have at least some options on the stock market as part of their retirement plan, but many experts agree that mutual funds are the way to go.

Rather than investing in a singular type of stock and being subject to the normal crashes and surges that they go through, a mutual fund gives you a way to play the stock market without all of this fear and uncertainty.

Because a mutual fund is a collection of hundreds of different stocks in different companies, your risk is spread further.

Even if one company happens to go down or a dramatic change in the market threatens a stock, you’ll still have hundreds of others to balance it out.

Therefore, you don’t have to worry about your entire investment strategy being destroyed just because you didn’t have a diverse enough portfolio.

Another huge benefit of mutual funds is that they’re generally a lot more affordable to invest in.

Units start at a low price and if you have enough time to invest in them while you’re still working, you’ll get a lot of steady rewards over the years.

You can do a lot with a little bit of money provided you’re able to keep the funds for some time and allow for serious growth.

Also Read: Is Gold A Good Investment For Retirement

What Are the Downsides of Mutual Funds?

Mutual Funds Downsides

Just as there are positives to consider, mutual funds come with negatives that you have to weigh up.

Most of these negatives have to do with the specific fund that you choose which is why it’s so important to choose one that’s run by a trusted portfolio manager with a good track record.

You are essentially putting your trust in the fund’s manager to know what they’re doing, and for people who prefer to take control, this might not be ideal.

Some mutual funds find it hard to outperform the market which means their growth and performance is slow.

Finally, mutual funds can be costly due to fees and other expenses.

There are a range of sales, administration, commissions, and management fees to expect and if the fund is underperforming then these will become obvious.

A mutual fund is better for a long term investment option because in the short term they might not get the returns you were hoping for.

The Best Mutual Funds for Retirement

US stocks mutual funds

Choosing a safe mutual fund is the goal when looking for a retirement option, but this can mean different things.

A safe mutual fund is one that can protect your savings and help you keep ahead of inflation, but it should also come with a little bit of risk, otherwise, there would be no reward.

With that in mind, these are some of the better choices for mutual funds for retirement.

  • Bonds: Bonds can
    include a mixture of both corporate and government bonds, or just one of these
    categories. You can choose either developed markets or emerging ones, hedging
    your bets either way.
  • International
    : To get international exposure you might choose a mutual fund that
    features large companies from other developed countries around the world.
  • US stocks: If
    choosing US stocks mutual funds, it’s important that you find one with a
    diverse mix of investments in large, medium, and small capitalization companies
    across the country.
  • Asset
    : These provide a mixture of both bonds, stocks, and cash, and are ideal
    for people who prefer to combine both options in the one.

The aim when choosing a mutual fund for retirement is to think about the long term.

These funds are better suited to those with time on their hands who can wait patiently for performance and growth over the years, so take into consideration how long you have until retirement before you decide what fund to choose.


Mutual funds are just one way that we can add to our retirement investment plan but they can also be confusing if you’re new to investing.

We’ve got the answers to some frequently asked questions about mutual funds and what they can mean for your retirement plan.

What’s the Average Return on a Mutual Fund?

12 percent mutual funds return rate

Although every fund operates differently and their performance can change dramatically, the average return you can expect on a mutual fund is around 12 percent.

This is based on long term performance and looks at the S&P 500 specifically, so other funds will vary.

Can You Lose Money on a Mutual Fund?

Any time you invest in something there’s a risk that it could go wrong, and it is possible to lose money on a mutual fund in a worst-case scenario.

Serious situations that could lead to a complete loss of money include all of the companies in the fund going under or a total failure of the economy.

Can You Withdraw Money from a Mutual Fund Without Penalties?

Any withdrawals you make from a mutual fund that you’ve recently invested in within 12 months will be subject to taxes.

A mutual fund is intended as a long term investment option and thus treated in this manner.

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