Most 401k plans offer a broad range of investment options, typically
at least five. They usually depend on the size of the company.
Larger employers tend to have more choices.
How your money is invested will have an enormous impact on your
return, so it is essential to know your options and educate yourself
in order to make sound and comfortable choices. The truly great
feature of a 401K plan is the fact that you can divide your money,
putting it into different financial vehicles, thus balancing the
investment risks and the relative certainty that some options
Fixed Funds, sometimes called Guaranteed Funds, are known for
steady, predictable growth in the long term. They carry Guaranteed
Interest Contracts underwritten by insurance companies, and because
of that fact are commonly considered very low risk funds. But
low risk also means low, fixed interest rates, and when offset
with inflation – small growth.
Mutual Funds are really great investment options designed to
reduce risk. They allow small investors to put their money in
stocks, bonds and other various instruments. An average
401K will offer at least a few mutual funds in which you can invest.
In general, you can further divide this form of investing into
the following categories:
- money market funds are considered very low
risk and have very low return. They use Treasury bills, certificates
of deposit and other instruments. Sometimes, the return on these
is less than inflation.
- bond funds invest in government loans, both
federal and local. They are low to moderate risk investments and
are very sensitive to interest rate changes.
- balanced funds mix stocks and bonds to reduce
the investment risk of stocks and to benefit from the certainty
- stock index funds consist of stocks of companies
which are found in market indexes and who generally follow the
stock market. Among all stock mutual funds, they are probably
the safest in which to invest.
- income and growth funds are investments in
companies which have a proven track record of paying dividends,
yet still have the potential for fast growth. The risk of these
funds is considered to be moderate.
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- growth funds select companies which have strong
growth potential, but have not proven to be highly profitable
by paying dividends.
- aggressive growth funds invest in usually
small companies, which have a great potential for growth. The
possibility of a high return comes with high risk investments.
- international funds invest in companies outside
the United States. These investments carry a risk of currency
exchange rates, economic and political conditions in other countries
and are commonly believed to have the greatest potential for a
Single company stocks (including a company you work for) always
represent a greater risk than any other kind of investment; thus
it should be only a small fraction of your overall 401Kinvestment.
401K plans are not insured by the federal government,
and their investments, whatever they might be, carry different
degrees of uncertainty. It is always advised by financial specialists
to diversify your investments by investing in different types
of assets. To find out more about mutual funds and other 401K
investment options; ask your plan administrator for information.
Financial magazines, prospectus and brochures also can be
good sources for learning about particular investment options.
Note that the above article is not intended to give financial
advice in any way, but is merely an introduction to 401K investment
See also: 401K
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Related topics: automatic
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