It really means going back to basic principles and shopping around when choosing the mutual funds for a ‘Roth’ IRA, or indeed a traditional IRA. An IRA is of course an Individual Retirement Account. It is the money that you invest in order to provide an income throughout your sunset years.
The money in mutual American funds comes every month from the salary accounts of individual workers everywhere and is also contributed to by the employers of those workers. While the money is taken automatically from pay the individual still has some discretion over how their retirement fund is invested. So ‘which are the best funds for your IRA’? is an important question.
The obvious answer to the question is; the mutual American funds that perform best in terms of earnings and capital growth are the best funds for an IRA. But how do you know the future performance of the funds will be as good as the past performance. There are many league tables of mutual fund performance and indeed the funds themselves and advertisements push one year and three year performance figures to attract new investors.
While past performance is important when looking for the best funds for your IRA there are seven other things to look out for:
1. Check out the fees charged for the various fund services. Never put your money into a mutual American fund that charges more than the average in its category. Morningstar’s web site compares all of the fund’s expenses with the average. Past expenses are a good indicator of future fees. There are many good low-cost mutual funds.
2. Check out turnover rates. The lower the turnover rate the better because dealing in shares is expensive. For example the Mairs & Power Growth fund has turnover rate of 2% per annum but it also has a 10-year average annual return of 17.5%.
3. Don’t fall for the hype. Advertising is an expense out of the current fund. They are using your money to attract new investors.
4. The best funds for an IRA over the long term will be the funds that have continued to produce results over the long term and in particular over the extraordinary times as in1999. How did they perform then? It shows how the managers cope with the market fluctuations. The Morningstar website gives full historical returns for all mutual American funds.
5. Are they well balanced in terms of size. The best funds for a Roth IRA are those most committed to managing funds rather than going all out for growth. Look for those that close the doors when they have the optimal fund dollars.
6. Index funds are those that simply follow a particular stock market index such as the Standard and Poor 500. Some mutual funds are index funds in disguise and charge more for the privilege. Avoid them, they are not the best fund for your IRA.
7. Finally the best funds for an IRA are those that have a stake in the investment along with the IRA contributors. They aren’t simply paid professional managers but they also win when the fund wins and lose when it loses.