Do Mutual Funds Have a Place in Your Self-Directed IRA?

Self-directed IRAs are an extremely valuable way for investors to reach their retirement goals. Custodians who offer self-directed IRAs, such as Quest Trust Company, enable account holders to invest in the full range of asset and investment types authorized by the IRS for individual retirement accounts. In addition to stocks, bonds and mutual funds, self-directed IRAs can be used to invest in real estate, foreign currency, precious metals and private equity and loan investments.

But self-directed IRAs offer the best of both worlds in that you’re still free to invest in those more traditional asset classes. In light of the multitude of investment choices available within a self-directed IRA, some account owners ask whether mutual funds have a place within their accounts.

Consider the Different Mutual Fund Types

Considering “mutual funds” as a potential investment is a very broad analysis – there are simply so many mutual fund choices available. In fact, it’s estimated that there are somewhere around 10,000 mutual funds that are currently available and accepting new investments. So it’s important to narrow your research to those funds that meet your investment goals and objectives. Of course, this means you need to have a good grasp of what your goals and objectives actually are.

For example, if you’re approximately 5 to 10 years away from your planned retirement date, then you may be considering reducing your exposure to highly speculative investments, and weighting more of your portfolio towards less volatile investments. In this regard, many large mutual fund companies offer “target date” mutual funds that you can match to your anticipated retirement date. Target date mutual funds look to balance exposure to different asset types in a way that matches income generation and preservation of capital with an eye towards the investor’s target retirement date.

Active vs. Passive Management

Many investors evaluate different mutual funds based on whether they are “actively” or “passively” managed. Actively managed funds tend to have a particular, often quite narrow, focus on a particular industry, investment philosophy or geographic area. These funds invest based on the research, experience and opinion of the fund managers, and the investment methodology is generally proprietary.

On the other hand, passively managed funds generally follow a predetermined investment path, such as seeking to mirror the performance of the S&P 500 or other broad index.

Make Sure the Fees are Reasonable

As you research various mutual fund options, you’re sure to see a broad range of fee structures. But keep in mind that high mutual fund fees aren’t necessarily a bad thing. It really depends more on what you’re getting for your money. For example, a 1% annual fee might be extremely low for an actively managed international fund, but that same fee would be considered quite high for a stock index mutual fund.

In short, mutual funds may have a place in your self-directed IRA, provided that you don’t have similar holdings in your other retirement and investment accounts, and we choose a mutual fund that best suits your investing needs.

Quest Trust Company helps change people’s lives and financial future through self-directed IRA investment education. Quest Trust Company helps people invest in what they know best and build their financial future on their own terms.

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