You’ll have a wide array of investment choices with your self-directed IRA. You’ll be able to invest in real estate, make private equity investments, issue private origins, and even invest in precious metals. Having all these investment options is certainly an advantage, but sometimes account holders will focus only on these more advanced investment options, to the exclusion of some of the more basic investment types.
For example, even more traditional investments such as stocks and mutual funds may have a place in your self-directed IRA. Let’s examine some of the pros and cons of using your account to invest in mutual funds.
Pro: Potentially Low Fees.
Mutual funds can, depending on the specific choices you make, have a very affordable fee structure. You’ll pay management and administrative fees to compensate the mutual fund managers for the investment activities they undertake, but those fees are simply deducted from your share price – you don’t need to make additional contributions were payments in order to cover those costs.
In general, the more actively managed a particular mutual fund is, the higher the fees will be. Funds that are passively managed, or which seek to duplicate objective measures such as a stock index, will likely be very inexpensive.
In addition, many leading mutual funds allow you to buy their shares with no sales or redemption charges whatsoever.
Con: Less Control Over Your Investment Decisions.
When you purchase shares up a mutual fund you’ll only be able to select a fund based on their general investment profile. But apart from passively managed funds (such as stock index mutual funds) there’s no way to control how your money is put to work beyond that.
Pro: Instant Diversification
One challenge that many investors have is maintaining appropriate diversification within their portfolios. But because mutual funds generally invest in a number of different underlying securities, will be able to achieve a measure of diversification simply by purchasing the fund shares.
Con: Under-Utilizing the Advantages of a Self-Directed IRA
Of course, while you may decide that mutual funds are an investment that you’d like to have in your portfolio, you need to ask yourself whether your self-directed IRA is the best vehicle for holding it. After all, chances are that if you have a self-directed IRA you also have various other investment and retirement accounts – it’s simply not common for someone to have a self-directed IRA as their only investment vehicle.
If you want to invest in mutual funds, why not use a taxable investment account or a 401(k) at work in order to hold the mutual fund shares? That way you can take full advantage of all the investment flexibility that your self-directed IRA has to offer.
Ultimately the flexibility and potential you have for your self-directed IRA must take into account your individual financial situation and investment profile. Mutual funds may have a place within your account, but perhaps they shouldn’t come at the expense of not making other types of investments.