Which Mutual Fund Company Is Best For Your IRA?

March 28th, 2008 · No Comments · Subscribe to this feed

I often hear people ask “Which mutual fund company should I open my IRA with?” There are many choices, but I’m going to narrow it down to three. Some companies not on the list, like Schwab or American Funds are also respectable choices, but in my opinion these three are by far the best.

Fidelity Investments is a venerable mutual fund company first popularized by a slew of super-star fund managers like Peter Lynch who achieved incredible returns year after year. While Fidelity no longer has a star manager of Lynch proportions, they do have a solid and deep research division and a slew of average-priced actively-managed funds in virtually ever stock and bond market sector you could imagine. Fidelity does have a few cheap index funds to compete with Vanguard, but they are limited to a Total Stock Market Index Fund, Extended Market Index Fund, Bond Market Index Fund, and an EAFE Foreign Index Fund. Then again, that’s really all you need if you want to keep it simple. Their Fidelity Freedom (target retirement) Funds are medicore at best. Similarly, you would probably be best off completely ignoring their multitude of narrowly-focused sector funds. All in all, Fidelity is an above-average choice, especially if you keep a close eye on costs, which aren’t always low here.

Avg Expense Ratios
Domestic Stock: 1.27%
International Stock: 1.48%
Municipal Bond: 0.72%
Taxable Bond: 0.92%

Min Investment: $2,500

Source: Morningstar

T Rowe Price runs a well-rounded line-up of mutual funds with below-average expenses. T Rowe has an established culture of controlling risk, and their funds tend to be less volatile than the category average. They are best known for their equity fund line-up; however, they also have a solid stable of fixed-income offerings, including a good, inexpensive, and unhedged international bond fund, which are difficult to find. The star attraction here are the Target Retirment Funds, which tend to be more aggressive than comparable retirement funds at other fund shops as they maintain a significant equity stake well into old-age. T Rowe also allows you to open an IRA with just $50 up-front so long as you promise to invest $50 in the account every month. This gives them a huge advantage over their competitors when it comes to small investors, since most other fund companies have minimums of at least a few thousand dollars to get started. If you don’t have much money to invest but want to start saving regularly, T Rowe Price is probably your best bet.

Disclaimer: I own stock in T Rowe Price.

Avg Expense Ratios
Domestic Stock: 0.91%
International Stock: 1.03%
Municipal Bond: 0.56%
Taxable Bond: 0.71%

Min Investment: $2,500

Source: Morningstar

Vanguard is my personal favorite mutual fund company and where I hold virtually all of my mutual fund assets outside of my company-sponsored 401k. When I leave, I will undoubtedly roll over my 401k to an IRA with Vanguard, just like I did last time. Why do I like Vanguard so much? It’s cheap. Not only does it offer a wide variety of index funds to choose from, but even their excellent actively-managed funds are dirt-cheap compared to the competition. Because Vanguard is a mutually-owned company (that is, they are owned by their fund holders), they can pass on savings from economies of scale directly to their fund investors. Because of this, I have much more confidence Vanguard won’t be tempted to screw me in the name of profits like many other fund companies might be. Because of all this and the fact that I’m an index-fund-fanatic, I would highly suggest to almost everybody that they open their IRA with Vanguard. The one exception would be those who have limited funds to invest, in which case T Rowe Price would be the best choice since they allow $50 initial investments.

Avg Expense Ratios
Domestic Stock: 0.27%
International Stock: 0.25%
Municipal Bond: 0.12%
Taxable Bond: 0.15%

Min Investment: $3,000

Source: Morningstar