What Are the Best Funds for a 401K?

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Depending on your age, you may have five, 10 or even 50 years before you plan on accessing 401k retirement funds. Time frames such as these are key factors in choosing the best mutual fund options offered by your portfolio administrator. The "best" is a relative term, with top performers rotating in the news year after year. However, you can find top performers that have consistent returns over time in any mutual fund investment risk and objective category.

Conservative Funds

Conservative mutual funds consist of a wide variety of bond funds that exist. There are Treasury bond funds, municipal bonds funds and large-cap corporate bond funds. Conservative funds look for modest returns on investment, focusing on preserving capital as you close in on retirement and needing access to the money. Finding the best conservative fund starts with looking at your objectives. Municipal bond funds are often a poor choice because these tax-free funds give you no additional tax benefits being in a 401k and often have lower interest rates. Good Treasury bond funds look to beat the existing Prime rate advertised at banks and financial sources. Corporate bond funds have slightly higher risk, but the best get a higher rate than Treasury bond funds. Look for a 10-year performance history to see what fund best meets you objectives.

Moderate Funds

Moderate funds seek to grow portfolios over the inflation rate while reducing the amount of risk in the portfolio. Balanced funds, growth and income funds and large cap stock funds fall into the moderate mutual fund category. These funds fluctuate more than conservative funds and can see major value drops during down markets. Good moderate portfolios seek to average 6 to 10 percent annually. Looking at a one- or two-year history is not enough to tell you whether a fund has a good chance of achieving this. The 10-year history and a look at how the fund performed in poor market years is the best indicator for long-term performance.

Aggressive Funds

Aggressive funds seek high returns where investors accept higher risk. Aggressive funds include those buying small-cap stocks, international and new market companies or new technologies. Small-cap and new technologies often don't have the track record to consistently prove returns and may experience growth difficulties or even go bankrupt. International funds have the added risk of political problems in the country of investment, as well as currency issues.

Portfolio Diversification

A diversified portfolio maintains a percentage of each fund risk category. Aggressive investors rarely have ultra conservative funds like Treasury funds in their portfolio. The 401k Help Center recommends those under the age of 40 to be in 100 percent stock funds, mixed between large cap, small cap and international funds. The older you get, the more you change your allocations to more conservative percentages with assets moved into fixed income bond funds. By the time you are 60, you should be equally divided in stock funds and bond funds reducing your stock holdings by 5 percent annually.


About the Author

With more than 15 years of professional writing experience, Kimberlee finds it fun to take technical mumbo-jumbo and make it fun! Her first career was in financial services and insurance.

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