Mutual Fund vs. 401(k)

Mutual funds and 401(k) accounts are popular retirement building tools.

Hemera Technologies/ Images

Once you enter the workforce, you want to keep that hard-earned money -- not only in your pocket, but invested for the future. If you're like most people, you don't want to work into old age. With judicious long-term investment opportunities such as mutual funds and 401(k) accounts, you can secure enough money for your golden years.

The Ins and Outs of Mutual Funds

For years, investors have purchased shares of ownership in companies to secure their financial futures. A mutual fund is an account in which money is pooled to invest in a collection of stocks, bonds or both. This adds a measure of protection that investing in individual stocks don't offer, since all your eggs aren't in one basket. Mutual funds consist of two categories: managed funds and indexed funds. In a managed fund, an investment manager makes conscious decisions on which stocks and bonds to invest in on a consistent basis. This provides more risk and more reward, since managers have the chance to make aggressive decisions. An index fund is more passive, since no manager controls it. Instead, the fund mirrors the trends of the index or other investing benchmarks. You can continuously invest in these funds either by having money allocated from your paycheck or setting aside money every few weeks.

The Basics of 401(k)

A 401(k) retirement account pools money in an account that isn't subject to taxes. Since the money is tax-deferred, it allows you to compile large amounts of money without being taxed for it until you're set to withdraw the money at retirement. Typically, a 401(k) consists of various mutual funds intended to last for years; you have to pay penalties and higher tax rate if you withdraw from your 401(k) before retirement age. You have the ability to customize your 401(k) accounts to your investment preferences. This not only includes how much money you contribute, but which mutual funds or other options, such as bonds, to invest in.

Mutual Fund or 401(k)?

The choice to invest in a mutual fund or a 401(k) is completely up to the needs of the investor. Most financial experts suggest enrolling in a 401(k) to shore up money for retirement, while investing in mutual funds for both long- and short-term gains. For instance, you might have a 401(k) plan through your company, a mutual fund that grows interest slowly to complement the 401(k), and a few smaller, higher-risk mutual funds for general investment purposes. The trick is to stay on top of each fund and not to panic or rejoice too much through the ebbs and flows.

Diversity is Beneficial to Your Investment Portfolio

While both mutual funds and 401(k) accounts are viable options, any financial expert will tell you to diversify. It doesn't pay to put all your hopes in one particular account or to invest in funds that cater too heavily to a single type of investment. Make wise decisions by doing research ahead of time, while spreading out your money sufficiently so that an economic downturn has a smaller chance of damaging your investments.