Mutual Fund

• A mutual fund is an investment company that takes capital from an investor and places it in a portfolio on the client's behalf. A mutual fund is a basket of investments. This basket of investments can be stocks, bonds or a combination of both. What a mutual fund does is pool the money of smaller investors together, investing it in various securities on their behalf.
  
  

Difference

• A 401(k) is an investment retirement account whereas a mutual fund is an investment vehicle that can be purchased within an investment account. A 401(k) is the vehicle that holds investments. Within the 401(k), you can purchase mutual funds, stocks, money markets and even shares of an annuity. Mutual funds are the most common investment offered in a 401(k). Buying shares of the mutual fund, stock, money market or the annuity is how you grow the money you have contributed.
  
  

Importance

• Investing in a 401(k) is a great way to save for retirement. In order to manage risk in this type of account, it is important to diversify investments. Diversifying involves buying mutual funds which have stocks, some which have bonds, and even real estate or money markets. Each mutual fund invests in a variety of securities and offers you the opportunity to diversify your assets. You can invest in just one mutual fund, which may have many types of securities, or multiple mutual funds.
  
  

Mutual Fund Types

• There are various types of mutual funds, including stock funds, bond funds and money market funds. Stock funds are considered growth funds and are bought for capital appreciation. Bond funds are more conservative and used for income that the bonds pay out. Money markets are considered liquid investments and do not fluctuate, helping you conserve your investment.
  
  

Considerations

• Mutual funds and 401(k)s complement each other. A 401(k) is generally a long-term investment vehicle for retirement purposes. When you invest in mutual funds, you have the opportunity for capital appreciation and an income stream. As the account grows, it grows tax-deferred. To simplify, a 401(k) is equivalent to a car, and the mutual fund is the driver in the car that gets you to your destination. Any gains made with your mutual funds are tax-deferred when you buy it as a 401(k).