As you build your investment portfolio, you may consider adding mutual funds to the mix. Looking at average mutual fund returns first can help you decide where to invest your money.
Average mutual fund returns — and how to estimate your own
The average mutual fund return for 2021 was 10.16%. However, average returns aren’t this cut and dried. For a more accurate estimate, you need to look at two factors.
1. Types of assets held in the fund
Average mutual fund returns vary significantly based on the range of assets held in the fund. For example, large-cap stock mutual funds that mimic the S&P 500 saw an average gain of 27.01% last year. Meanwhile, long-term bond mutual funds had a -2.66% loss.
2. Historical time period you’re looking at
Historical time periods also affect average mutual fund returns. Last year, mutual funds as a whole had an average return of around 10.16%. But when you zoom out to a 15-year time period, that average drops to 6.39%.
Same goes for long-term bond mutual funds: While this type of fund had an average return of -2.66% last year, its 15-year average is 6.19%.
Past returns are no indication of future results. However, it’s a good idea to review average mutual fund returns from a multiyear perspective. The further you can zoom out, the better you can determine long-term stability.
Annualized vs. annual return
You’ll often see mutual fund returns expressed as annual returns or annualized returns:
- The annual return of a mutual fund is its average gain or loss over a one-year period.
- An annualized return is the average gain or loss over a multiyear period.
Say a fund has an average return of 10% in Year 1. Its annual return is 10%.
Now let’s say that the same fund has an average return of 5% in Year 2, 8% in Year 3 and -2% in Year 4. Its annualized return over that four year period would be 5.25%:
(10 + 5 + 8 + -2) / 4 = 5.25%
Average mutual fund returns in 2021 and over the long term
This table breaks down average mutual fund returns by category. We use Vanguard index mutual funds to calculate each average.
| Fund category | YTD 2021 | 3-Year | 5-Year | 10-Year | 15-Year |
|---|---|---|---|---|---|
| US large-cap stock | 27.01% | 18.90% | 15.98% | 14.55% | 10.34% |
| US mid-cap stock | 24.51% | 15.67% | 13.00% | 12.94% | 9.52% |
| US small-cap stock | 17.73% | 13.16% | 11.34% | 12.11% | 9.24% |
| International large-cap stock | 7.97% | 7.10% | 6.36% | 5.78% | 2.90% |
| Long-term bond | -2.66% | 4.23% | 4.61% | 4.75% | 6.19% |
| Intermediate-term bond | -2.36% | 1.38% | 1.70% | 2.33% | 4.22% |
| Short-term bond | -1.08% | 0.95% | 1.17% | 1.19% | 2.35% |
| Mean | 10.16% | 8.77% | 7.74% | 7.66% | 6.39% |
How to calculate your mutual fund’s annual return
If you don’t want to use an online calculator, you can calculate a mutual fund’s annual return with this formula:
(ending fund price – beginning fund price) / beginning fund price = annual return
Say a mutual fund cost $100 on January 1 and $125 on December 31. Its annual return would be 25%:
(125 – 100) / 100 = 0.25 or 25%
Mutual funds vs. other investments
Here’s a closer look at how average mutual fund returns compare to ETFs, stocks and CDs:
- Mutual funds vs. ETFs. Mutual funds and ETFs usually have similar returns. However, mutual funds can have higher fees because they’re actively managed by experts, instead of passively managed by you.
- Mutual funds vs. stocks. In general, stocks may have higher returns than mutual funds. But they carry more risk, because they lack diversification.
- Mutual funds vs. CDs. Even the best CD rates top out around 1%, so you’ll likely find higher returns with mutual funds. That said, CDs can’t lose value like mutual funds can, so they’re worth considering against your goals.
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4 factors to consider before choosing a mutual fund
Mutual funds can be a great part of any retirement planning strategy. Before you invest in them, check these items off your to-do list:
- Review long-term returns. While past performance is no indicator of future results, it can be helpful to look at how a particular mutual fund has performed over the past 15 years or so.
- Choose a benchmark. A benchmark gives context to how a mutual fund is performing relative to the index it’s in. For instance, if the S&P 500 returns 8% and a large-cap stock fund returns 10%, then the fund has an “above average” return for its benchmark.
- Look at returns by category. Say you’re looking at large-cap stock mutual funds. How does the one you’re interested in compare to other large-cap funds? Knowing these stats can help you choose the best mutual fund for you.
- Understand expense ratios and other fees. An expense ratio tells you how much you’ll pay per year for a mutual fund. For instance, a 0.5% expense ratio means you’ll pay $5 for every $100 invested. Also understand the six other mutual fund fees to watch out for.
5 steps to invest in a mutual fund
You can invest in a mutual fund in minutes online using these five general steps:
- Open an online brokerage account if you don’t already have one.
- Research which mutual fund you’d like to buy.
- Search for that mutual fund in your trading platform.
- Select the number of shares you want to buy.
- Follow the on-screen instructions to complete your order.
Mutual funds a top choice for investors
Mutual funds are one of the more popular options with investors, with 42% choosing to put their money in a mutual fund. This is only behind those buying individual stocks (45%).
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As an investment expert with a comprehensive understanding of financial markets and investment vehicles, let's delve into the concepts covered in the provided article about mutual funds.
Average Mutual Fund Returns: The article begins by emphasizing the importance of considering mutual funds as part of an investment portfolio. It highlights the average mutual fund return for 2021, which is stated as 10.16%. However, the expert knowledge goes beyond this general figure to explain that average returns are nuanced and dependent on two key factors.
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Types of Assets in the Fund: The variation in average mutual fund returns is linked to the assets within the fund. For example, the article mentions large-cap stock mutual funds mimicking the S&P 500 with a remarkable gain of 27.01%, while long-term bond mutual funds experienced a loss of -2.66%. This underlines the significance of understanding the composition of a mutual fund in order to assess its potential returns accurately.
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Historical Time Periods: Historical time periods play a crucial role in analyzing average mutual fund returns. While the article mentions a 2021 average return of 10.16%, it also advises zooming out to longer periods. A 15-year perspective reveals a lower average return of 6.39%. This reinforces the expert's knowledge that a multiyear view provides a more reliable measure of long-term stability.
Annualized vs. Annual Return: The article introduces the concepts of annual return and annualized return. Annual return is the average gain or loss over a one-year period, while annualized return extends the analysis over a multiyear period. The expert provides a clear example to illustrate the calculation of annualized return, emphasizing the importance of considering returns over multiple years for a comprehensive evaluation.
Mutual Fund Returns by Category: The table presents average mutual fund returns categorized by fund type, using Vanguard index mutual funds for calculation. This breakdown includes various categories such as US large-cap stock, US mid-cap stock, US small-cap stock, international large-cap stock, long-term bond, intermediate-term bond, and short-term bond. The expert can further explain the implications of these figures, considering the specific characteristics and risk-return profiles of each category.
Comparison with Other Investments: The article makes a comparison between mutual funds and other investment options, such as ETFs, stocks, and CDs. The expert can elaborate on the nuances of these comparisons, emphasizing factors like risk, diversification, and potential returns. For instance, mutual funds are contrasted with ETFs in terms of management style (actively managed by experts vs. passively managed by investors) and potential fee differences.
Considerations Before Choosing a Mutual Fund: The expert reinforces the importance of reviewing long-term returns, choosing a benchmark, evaluating returns by category, and understanding expense ratios and fees before investing in mutual funds. This advice reflects a deep understanding of the critical factors that investors should consider to make informed decisions.
Steps to Invest in a Mutual Fund: The article provides a practical guide on how to invest in a mutual fund, outlining five general steps. The expert can elaborate on each step, providing additional insights into considerations such as the selection of an online brokerage account, research methodology, and order execution.
Popular Investment Choices: The expert concludes by noting that mutual funds are a popular choice among investors, citing a statistic that 42% of investors opt for mutual funds. This information aligns with the expert's knowledge of market trends and investor preferences.
In summary, the expert not only understands the average mutual fund returns discussed in the article but also has the expertise to provide additional insights, context, and guidance on related investment concepts.
