What Are Sub-Account Choices in a Mutual Fund?
Mutual funds are great investment vehicles for people who don't have either the money or risk tolerance for individual stock and bond purchases. They allow the layman to invest in a variety of several hundred companies at once with low minimum investments and a diverse set of risks. While mutual funds are investments and offer fluctuation risk and investment risk, they mitigate the loss by spreading the risk over many companies that meet a specific investment objective. For those new to investing or saving for retirement, mutual funds are a great way to get their feet wet and learn about the variety of sub-accounts a mutual fund company will offer.
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What Are Sub-Accounts
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Where a mutual fund is a collection of similar types of either stocks or bonds or a mixture of the two, a mutual fund company offers a wide variety of fund selections depending on the investment objectives of the investor. Sub-accounts are typically referred to in umbrella financial vehicles such as variable annuities or variable whole life where the investor is buying a particular type of product or investment and has the option to choose from a diverse list of sub-accounts. Once in the investment, they are allowed to move within the sub-accounts without incurring any penalties or fees for the move as their investment objectives change.
Risk Tolerance
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The wonderful thing about sub-accounts is that they create an investment ideal for every level of investor from conservative income-seeking investors to high-risk wealth-building investors. They also allow the investor to create a mix of low to high risk investments. For example, conservative investors want to invest in high-grade bonds which are offered in an income bond fund sub-account, while the more aggressive investors will put their money in a small cap emerging international economies fund. Investors can further customize their portfolios by spreading the percentage of their investments in the small cap fund, growth & income fund and a bond fund to create a balanced and diverse portfolio.
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How To Choose
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Choosing a sub-account may be simple for some and very confusing for others. The best way to determine which sub-account to choose is to review the objective of the fund to see if it correlates to the person's investment objective. The best way to fully understand what companies the sub-account is investing money in is to review their stock portfolio listing. While this is a dynamic list that can change frequently, it will give investors the best understanding of where their money is being put. If an investor wants Fortune 500 companies as her primary investment, then she should see those companies listed as the stocks or bonds within the sub-account.
Variable Annuities and Life Insurnace
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These are the vehicles in which mutual fund sub-accounts are utilized. The actual investment the client is purchasing is an insurance product designed for either wealth accumulation or estate liquidity needs upon death. Policy owners are allowed to select from a list of mutual fund sub-accounts of every investment objective to get their anticipated rate of return. The reason for use of sub-accounts in these policies is to allow the cash value to increase and grow tax-deferred, to be used under specific conditions during the lifetime of the annuitant or insured. The investment vehicle makes this an attractive investment by combining insurance, tax benefits and diversified investment options for the client.
Time Frame
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Mutual funds are designed to be long-term investments. Account values will fluctuate over time depending on market conditions and the risk level of the sub-accounts. While every investment has a possibility of losing all of its money, conservative investments historically provide less ups and downs than higher-risk investments. Investors should always consult with their financial advisers if unsure about how to best allocate their sub-accounts to meet their long-term financial objectives.
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