Can someone explain IRA's and Mutual Funds?

Question

ok, im in my 20's and people keep telling me that i need to open up one of these 2 things. Ive read up on them, and i dont fully understand the purpose of them. They just sound like savings accounts which i already have. I dont want to end up like all of these people that lose thousands of dollars like those enron people and who ever else it has applied. So i was wondering could someone explain them in as simplest terms because im not all into the stock, investments and stuff like that, If there is any risk of losing my money if the company goes belly up id rather not take that risk and if that means when i retire i have no money then so be it, i think a savings will do just fine especially with the money i put in it every month

Answer 1

I written a blog about this at http://obe231.blogspot.com.

In simple terms, IRAs are Individual Retirement Accounts. You need a vehicle to fund these IRAs. These vehicles includes mutual funds, bonds, stocks, and CDs.

A mutual fund is an investment company that pulls together a pool of money from investors and then use it to buy shares of stocks from various companies. Since mutual funds invests in so many different companies, it is said that your investments are diversified. Every mutual fund has a certain objective, whether its long term gain, capital appreciation, some growth with protection on principal, etc. Whatever your investment objective is, there is a mutual fund out there that can meet it.

I open my Roth IRA not too long ago and I picked 3 mutual funds to lower my risk to market fluctuations.

As for the Enron case, the reason why many people lost money is because in their retirement plan such as a 401k, they had bunch of Enron stocks. You should not fund your retirement accounts with stocks since they are very risky investments.

Anyway, if you want to read more about mutual funds and IRAs, check out this blog: http://obe231.blogspot.com

Answer 2

An IRA is a vehicle to hold investments, which can be in cd's, savings accounts, individual stocks, mutual funds. etc.

A mutual fund is something you can invest your IRA money in.
It is a fund of money raised from multiple shareholders and invests in many stocks at once. The type of stock is determined by the goals of the fund.

Mutual fund share prices flucuate with the value of the stocks it holds. However you are very unlikely to suffer a major loss if one or more of its holdings go bankrupt because in most funds the investment in one company is limited, usually less than 5% of total assets.

They are not like savings accounts. With a savings account you receive interest, but are unlikely to beat inflation. You would probably lose money in the long run if you consider the decline in buying power of the dollar. If you pay taxes on the interest you are guaranteed to lose.

I would recommend that you open an IRA and invest it in a no-load, low cost mutual fund - the Vanguard index funds are excellent choices.

The average long term return of the US stock market is 10% a year compounded. If you invest $4000 a year in an IRA, it will grow tax free and you will have about $2.5 million dollars at 65. You will not be able to match that with a savings account.

Then read some books about investing so that you know what you are doing.

Answer 3

With any "investment" there is a risk of losing money. withthe stock market ...it will fluctuate and your balance will go up and down continuously. The main difference between a IRA and a mutual fund is IRA are retirment accounts that usually have penalties for early withdrawal prior to say around 59.5 yrs old. however if you have a ROTH IRA the interest that you earn on your investment if kept in the account until retirement will be yours tax free. Mutual funds are similar to IRA's except that they are not specifically for retirement and can be withdrawn at anytime for any reason. My suggestion is to go with a ROTH IRA because of the tax savings and also the reward is sooo well worth thte risk and you will get a much better return on your money than with a regular savings account which is usually 1-5% depending on the bank. IRA returns are similar to stock market returns which can range usually in the 8-12% range.

I hope this helps alittle.

Answer 4

IRA stands for Individual Retirement Account, and its name is exactly what it is. There are two types - a traditional IRA, where you get a tax deduction for money you put in, but whatever you take out upon retirement is taxed; and a Roth IRA, where you use after-tax money to fund it, but all of the earnings are tax-free. These are designed, along with 401k's, 403's, Keoughs, etc. to supplement income from Social Security.

Mutual funds are funds that invest in more than one type of investment to minimize risk. There are three main types - stock mutual funds, which invest in company stocks; bond mutual funds, which invest in different types of government and municipal bonds; and money market mutual funds, which invest in various certificates of deposits, etc. Each invests in a number of the type of investment it has. The benefit of this, in the instance of a stock mutual fund, is that if a company that you have stock in goes belly-up, you lose the investment. If your mutual fund is invested in it, you will take a loss but won't lose the entire investment as that fund also has stock in a large number of companies. Each mutual fund is designed for a different goal, whether it be to invest in large, mid-cap, or small companies, whether it's shooting for growth (price of the shares going up) or income (companies it invests in paying dividends), whether it invests in domestic or international markets, etc. As your money grows, you want to spread your investments out over a wider variety of types, and you also want to change what you're investing in as you get older. Mutual funds can be used as an investment on their own (where your gains are taxable) or as part of a retirement program (where they aren't outside of the tax setup for the retirement program itself).

The two are not like savings accounts and no savings account can match the returns of mutual funds.