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When shopping for mutual funds, we naturally are curious: Which ones are performing the best today?
While that’s a common place to begin your search, remember you’re shopping for tomorrow when looking for the best mutual funds. Top performers in the short term don’t always become long-term winners. The best mutual funds for your portfolio won’t necessarily be the best for your parents, your siblings or your neighbors.
» Looking to fund an IRA before tax day? See our picks for best IRA accounts.
Best-performing U.S. equity mutual funds
To determine the best mutual funds measured by five-year returns, we looked at U.S. equity funds open to new investors with low costs (expense ratios of 1% or less) and minimum investment requirements of $3,000 or less.
For more on how to choose a mutual fund, skip ahead to this section.
Ticker | Name | 5-year return (%) |
---|---|---|
USBOX | Pear Tree Quality Ordinary | 13.79% |
SSAQX | State Street US Core Equity Fund | 13.66% |
PBFDX | Payson Total Return | 13.61% |
STSEX | BlackRock Exchange BlackRock | 13.41% |
CORRX | Columbia Contrarian Core Adv | 13.40% |
SRFMX | Sarofim Equity | 13.29% |
FGRTX | Fidelity® Mega Cap Stock | 13.28% |
Source: Morningstar. Data is current as of December 1, 2023 and is for informational purposes only.
What is a mutual fund?
Mutual funds are companies that combine investors' money to purchase investments. Mutual funds create a more diversified portfolio than most investors can on their own. "Mutual funds" are a category that include index funds, exchange-traded funds, bond funds and target-date funds. Mutual fund investors don’t personally own the stock or other investments held by the fund, but they do share equally in the profits or losses of the fund’s total holdings.
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How to choose the best mutual funds for you
NerdWallet’s recommendation is to invest primarily through mutual funds, especially index funds, which passively track a market index such as the S&P 500. The mutual funds above are actively managed, which means they try to beat stock market performance — a strategy that often fails.
» Ready to invest? Here's our picks for best brokerages for mutual funds.
When you're ready to invest in funds, here's what to consider:
Decide whether to invest in active or passive funds, knowing that both performance and costs often favor passive investing.
Understand and scrutinize fees. A broker that offers no-transaction-fee mutual funds can help cut costs.
Build and manage your portfolio, checking in on and rebalancing your mix of assets once a year.
» Learn more: How to invest in mutual funds
Average mutual fund return
Managing your portfolio also means managing your expectations, and different types of mutual funds should bring different expectations for returns.
For actively managed investments, particularly those with higher fees, it is difficult to consistently beat the index. In fact, it rarely happens. Most investors would be better served with a passive investment strategy. Some investors may be best served by a combination of exchange-traded funds and mutual funds that incorporate large, mid, and small cap stocks as well as international and emerging markets.
Depending on your risk tolerance, you may want to explore bond ETFs as well. But you should always do your homework to explore which investments will make the most sense for your portfolio.
Stock mutual funds = higher potential returns (or losses)
Stock mutual funds, also known as equity mutual funds, carry the highest potential rewards, but also higher inherent risks — and different categories of stock mutual funds carry different risks.
» Related: Best performing stocks this month
For example, the performance of large-cap high-growth funds is typically more volatile than, say, stock index funds that seek only to match the returns of a benchmark index like the S&P 500. (Learn more about stock mutual funds versus index funds.)
» Related: 25 best performing high-dividend ETFs
Bond mutual funds = lower returns (but lower risk)
Bond mutual funds, as the name suggests, invests in a range of bonds and provide a more stable rate of return than stock funds. As a result, potential average returns are lower.
Bond investors buy government and corporate debt for a set repayment period and interest rate. While no one can predict future stock market returns, bonds are considered a safer investment as governments and companies typically pay back their debt (unless either goes bust).
Money market mutual funds = lowest returns, lowest risk
These are fixed-income mutual funds that invest in top-quality, short-term debt. They are considered one of the safest investments you can make. Money market funds are used by investors who want to protect their retirement savings but still earn some interest — often between 1% and 3% a year. (Learn more about money market funds.)
Mutual fund fees
Even if you find a low-cost mutual fund, you'll still have to pay some fees. Here are some to look out for:
Management fees: Also known as "expense ratios," these cover the cost to pay fund managers and investment advisors.
12b-1 fees: Capped at 1%, these fees pay for the cost of marketing and selling the fund and other shareholder services.
Other expenses: These may include custodial, legal, accounting, transfer agent expenses and other administrative costs.
The total annual fund operating expenses are expressed as a percentage of the fund's net average assets.
» How do fees impact returns? This mutual fund calculator can help
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Can you lose money in mutual funds?
Yes, as with all investments, it is possible to lose money in mutual funds. But if you invest in well-diversified mutual funds with a long investment timeframe, you'll likely benefit from compound interest and grow your money over time.
Mutual funds: The bottom line
Chasing past performance may be a natural instinct, but it often isn't the right one when placing bets on your financial future. Mutual funds are the cornerstone of buy-and-hold and other retirement investment strategies.
Likewise, chasing one-year returns is not a wise investment strategy. It's a good rule of thumb to look for consistency of returns on a longer time horizon. It would be wise to look at the three, five, and 10 year returns to get a sense of a longer track record.
Hopping from stock to stock based on performance is a rear-view-mirror tactic that rarely leads to big profits. That's especially true with mutual funds, where each transaction may bring costs that erode any long-term gains.
What's important to consider is the role any mutual fund you buy will play in your total portfolio. Mutual funds are inherently diversified, as they invest in a collection of companies (rather than buying stock in just one). That diversity helps spread your risk.
You can create a smart, diversified portfolio with just a few well-chosen mutual funds or exchange-traded funds, plus annual check-ins to fine-tune your investment mix.
Neither the author nor editor held positions in the aforementioned investments at the time of publication.
I'm an investing enthusiast with a knack for navigating the complex world of mutual funds. To demonstrate my expertise, let's dive into the concepts mentioned in the article.
Firstly, mutual funds are investment vehicles that pool money from various investors to purchase a diversified portfolio of stocks, bonds, or other securities. The article touches on different types of mutual funds, including index funds, exchange-traded funds (ETFs), bond funds, and target-date funds. Each serves a specific purpose and risk profile in an investor's portfolio.
Now, the article provides a list of best-performing U.S. equity mutual funds based on five-year returns. This involves evaluating funds with low costs (expense ratios of 1% or less) and minimum investment requirements of $3,000 or less. The mentioned funds, such as USBOX and SSAQX, have demonstrated impressive returns, showcasing the importance of both performance and cost considerations.
Moving on, the article distinguishes between actively managed and passively managed funds. It recommends primarily investing in index funds, which passively track a market index like the S&P 500, highlighting the often challenging nature of beating stock market performance through active management.
The discussion on fees emphasizes the importance of understanding and scrutinizing fees associated with mutual funds. It mentions expense ratios, 12b-1 fees, and other expenses, shedding light on the total annual fund operating expenses as a percentage of the fund's net average assets.
The article also delves into the different expectations for returns based on the type of mutual fund. Stock mutual funds, or equity funds, come with higher potential rewards and risks, especially in the case of large-cap high-growth funds. On the other hand, bond mutual funds offer more stability but with lower average returns.
Lastly, the article touches on money market mutual funds, emphasizing their role as low-risk, low-return investments in top-quality, short-term debt. It rounds off the discussion by addressing the potential for losses in mutual funds, the significance of a long investment timeframe, and the role of consistency in returns over a longer horizon.
In essence, the article advocates for a thoughtful approach to mutual fund investment, considering factors such as fund type, fees, and long-term performance rather than chasing short-term gains.