Each Wednesday 401kBasics posts a new article in a weekly series called “Keep the Course”. This series is designed to give the average consumer information on how to keep their 401k plan on track! Your feedback or suggestions on future articles is welcome.
In order to properly manage your 401k plan, one of the most important things to understand is the underlying investments of the plan. Your 401k plan provides you with a selection of mutual funds. The funds can be cash equivalents, bonds, stocks or a variance of all of these. Here, we’re going to focus on cash equivalent investments. Cash equivalent investments consist of the following:
- Certificates of Deposit (CDs)
- Treasury Bills
- Commercial paper
- Money market funds
The goal of these types of investments is preservation of principle. To attain this goal, the market risk is low, and as a result the return is also fairly low. The specific type of risk involved with this fund is inflation risk—that is the risk of not having enough growth to keep up with inflation. This type of fund is a short-term investment, suitable for someone who will need access to their money in the near future.
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