The first thing to consider when choosing investments for your IRA is the fees associated with those investments -- all mutual funds charge fees of some type. Fees cut into your returns on investment and, since an IRA is designed to allow you to maximize and compound those returns free of taxes until the funds are withdrawn, it pays to compare the fee structures of mutual funds you are considering for investment.
Your age is important in choosing the types of mutual funds for your IRA. In your 30s, weight your investments 70 percent to 80 percent in risk investments such as stocks, with the remainder in conservative investments such as bonds. As you age, transition the emphasis in your portfolio toward more conservative investments until, at 60 or a couple of years before you plan to retire, the majority of your portfolio is in conservative income-producing investments. Within your risk requirements, avoid buying different mutual funds that hold the same assets. Unless you check the portfolios of mutual funds for duplication of securities investments, your portfolio may not be adequately diversified since many mutual funds have similar portfolios.
Index funds are designed to duplicate the securities and performance of stock market indexes such as the Dow Jones Industrial Average and the Standard & Poor's 500 Index. All index funds are similar in holdings for each index covered, so you only need one for each index. Make your choice based on performance and fees.
Growth fund performance depends on the skill of the investment manager. These funds contain investments in companies that have been exhibiting strong earnings growth. They represent greater risk than index or bond funds, but can also return greater profits. Balanced growth funds attempt to mitigate some risk by including a percentage of bond investments. When buying, consider your personal tolerance for risk as well as the fund's performance over the previous five years.
Specialty funds invest in certain geographic or industry sectors. They can be risky and volatile and, like growth funds, their performance reflects the skill of the investment manager. Check their portfolios against the portfolio assets of your other funds to guard against too many stocks in one industry or sector. For example, technology stocks are heavily represented in many mutual funds so you may not achieve good diversification of assets if you buy a technology fund.
Treasury or high-grade corporate bond funds are conservative income-producing investments. Junk bond or high-yield bond funds are risk investments. Municipal bond funds are not appropriate for IRAs because the income they produce is free of federal, state and local taxes depending on where you live. When buying bond mutual funds, check the five-year performance record and the fees. During low interest rate periods, the fees can be higher than the income produced by the investments.
Victoria Duff specializes in entrepreneurial subjects, drawing on her experience as an acclaimed start-up facilitator, venture catalyst and investor relations manager. Since 1995 she has written many articles for e-zines and was a regular columnist for "Digital Coast Reporter" and "Developments Magazine." She holds a Bachelor of Arts in public administration from the University of California at Berkeley.