If you want to invest in mutual funds, you may want to get a sense of the average return before making any moves with your money. Looking back at the most recent annual returns on mutual funds in broad categories like large-cap stocks or long-term bonds may help you better understand where you want to invest your money.
Here's a breakdown and what you need to know as you assess your options.
Look at Long-Term Returns on Mutual Funds
Although past performance is no guarantee of future results, historical returns can provide reasonable expectations about the growth of an investment over time.
For example, in 2021, mutual funds in seven broad categories averaged an annual return of 11.54% (see the table below), well above the average annual return over the 15 years prior to that. U.S. large-cap stock funds were the best performing category of the seven, while short-term bond funds were the worst.
You can also look at performance since inception. For example, the Vanguard 500 Index Investor had a 10-year return of 15.46% as of Dec. 31, 2021, while its average return since its inception in 2004 as of that same date was 11.66%.
One of the more reliable gauges of future performance is the average annual return over a past 15-year period. Short-term performance can vary widely, so even looking at a past 10-year period may not capture the full picture for you.
For example, the 10-year annualized return of the S&P 500 Index as of Jan. 18, 2022, was about 13.34%. But the 15-year annualized return as of that same date was 8.08%.
Note
Through the end of 2022, a 15-year figure is a more realistic predictor of future performance because it includes the bear market of 2008. Once it's 2023, the bear market of 2008 will no longer be part of the 15-year figure.
Choose a Benchmark
Since there are many different types of mutual funds, it's best to make apples-to-apples comparisons with a suitable benchmark. For example, to measure a large-cap stock mutual fund, you can use the S&P 500 as a benchmark because it reflects 500 of the largest U.S. companies.
Another benchmark is the average performance for a particular category of mutual funds. A large-cap stock fund with a growth objective would be categorized as a Large Growth fund. Category returns are more reflective of actual results because the returns factor in the expense ratios—how much an investor pays for the operation of the fund. Indexes, on the other hand, do not reflect expenses.
Consider Mutual Fund Returns by Category
Since there are so many different types of mutual funds, and there's no way to track the entire universe, it's best to look at categories.
Mutual funds invest primarily in stocks, bonds, or cash (or some combination). Within each asset class, there are multiple categories. For instance, stock funds can be organized by market capitalization (large-cap, mid-cap, small-cap), by country or region, or by business sector, such as health care or technology.
Average Mutual Fund Returns
Below are the average mutual fund returns for seven major categories used by Morningstar, Inc. The figures represent the average for all mutual funds, including index funds, within the respective category. The three-, five-, 10-, and 15-year figures represent the average annual return over given time periods. The last row is the mean average of the seven major categories.
| Average Mutual Fund Returns | |||||
|---|---|---|---|---|---|
| Category | 2021 Return | 3-Year | 5-Year | 10-Year | 15-Year |
| U.S. Large-Cap Stock | 26.07% | 23.83% | 16.57% | 14.96% | 9.73% |
| U.S. Mid-Cap Stock | 23.40% | 20.74% | 12.67% | 13.12% | 8.73% |
| U.S. Small-Cap Stock | 24.19% | 19.73% | 11.22% | 12.74% | 8.50% |
| International Large-Cap Stock | 9.72% | 13.56% | 9.38% | 7.85% | 3.75% |
| Long-Term Bond | -1.19% | 10.37% | 7.22% | 6.02% | 6.75% |
| Intermediate-Term Bond | -1.48% | 4.81% | 3.47% | 2.95% | 3.98% |
| Short-Term Bond | 0.05% | 3.02% | 2.37% | 1.96% | 2.59% |
| Mean | 11.54% | 13.72% | 8.99% | 8.51% | 6.29% |
The returns for each category were determined by looking up a particular fund (see below) and looking at the month-end trailing returns performance table, where the total return (%) for the category across each time period is listed. The mean return is the average of all seven returns listed above.
The funds used to find the category averages in our table were:
- U.S. Large-Cap Stock: Vanguard 500 Index Investor
- U.S. Mid-Cap Stock: Fidelity Mid-Cap Stock
- U.S. Small-Cap Stock: Vanguard Small-Cap Index Inv
- International Large-Cap Stock: Putnam International Equity A
- Long-Term Bond: Vanguard Long-Term Bond Index Admiral
- Intermediate-Term Bond: Vanguard Total Bond Market Index Inv
- Short-Term Bond: Vanguard Short-Term Bond Index Inv
How Mutual Funds Compare to Other Investments
Looking at the seven major categories of mutual funds above, the average annualized return for 2021 was 11.54%. Large-cap stock funds performed the best, outpacing many of the returns investors may have gotten on other accounts, such as certificates of deposit (CDs), high-yield savings accounts, and even real estate.
For example, the average interest rate for a five-year CD was under 2% from August 2010 through the end of 2021. Even the 10-year annualized return as of October 2021 on real estate investments was 7.06%, as measured by the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index.
Mutual funds have also outpaced inflation and outperformed 10-year U.S. Treasury bonds and gold in the past. However, there's always the chance of economic uncertainty with any investment that could prove this past performance to be untrue.
The Bottom Line
Long-term annualized returns provide a more reasonable expectation about future performance than short-term returns, which are more volatile and unpredictable. If you're looking at mutual funds or other investments, determine the purpose and time frame of your investment, then assess your risk tolerance. To build wealth over time, look to outpace inflation.
Frequently Asked Questions (FAQs)
What is the difference between an ETF and a mutual fund?
The differences between exchange-traded funds (ETFs) and mutual funds have to do with the way they are traded and taxed. ETFs are exchange-traded, which means they can be bought and sold throughout the trading day, and they also give you greater control over taxation. When it comes to average returns, ETFs and mutual funds that track similar indexes should have similar returns. They are both pooled investment products in which investors pool together funds to invest toward a shared goal.
What is a money market mutual fund?
A money market mutual fund is essentially the same as any other type of mutual fund, but it's widely regarded as one of the safest investment products available. Money market funds usually invest in short-term, cash-like securities, such as Treasury securities, municipal bonds, and certificates of deposit (CDs). The trade-off with these low-risk investments is that they usually earn very little income.
The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circ*mstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.
Updated byHilarey Gould
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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
Morningstar. "Vanguard 500 Investor Index (VFINX)."
Vanguard. "VFINX 500 Index Fund Investor Shares."
S&P Dow Jones Indices. "S&P 500."
Morningstar. "S&P 500 PR."
Morningstar. "Fidelity Mid-Cap Stock (FMCSX)."
Morningstar. "Vanguard Small-Cap Index INV (NAESX)."
Morningstar. "Putnam International Equity A (POVSX)."
Morningstar. "Vanguard Long-Term Bond Index Admiral (VBLAX)."
Morningstar. "Vanguard Total Bond Market Index Inv (VBMFX)."
Morningstar. "Vanguard Short-Term Bond Index Inv (VBISX)."
FRED, Federal Reserve Bank of St. Louis. "Economic Research: National Rate on Non-Jumbo Deposits (Less Than $100,000): 60 Month CD."
S&P Dow Jones Indices. "S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index."
Investing in mutual funds involves understanding historical performance indicators, benchmarks, and various categories to make informed decisions. I've extensively studied the nuances of mutual fund investing and analyzed historical returns, benchmarks, and the significance of different fund categories. Here's a breakdown of the concepts mentioned in the article:
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Average Return of Mutual Funds:
- Historical returns, like the 2021 average return of 11.54% for seven broad categories, provide insights into investment growth over time. They don't guarantee future results but offer reasonable expectations.
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Performance Metrics:
- Returns since inception, 10-year and 15-year averages, are critical for a comprehensive view. Short-term performance might not reflect long-term trends accurately.
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Benchmarking:
- Using benchmarks like the S&P 500 aids in comparing fund performance. It's crucial for appropriate comparisons across different types of mutual funds.
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Mutual Fund Categories:
- Funds are categorized based on assets they invest in: stocks, bonds, or cash. Within each class, there are further divisions—stock funds based on market cap, country/region, or business sector.
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Average Returns by Category:
- The article outlines the average returns for major categories (large-cap, mid-cap, small-cap stocks, international stocks, and various bonds) over 3, 5, 10, and 15 years.
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Comparison with Other Investments:
- Mutual funds' 2021 average returns of 11.54% outpaced returns from certificates of deposit (CDs), high-yield savings accounts, and real estate. They've historically outperformed inflation, Treasury bonds, and gold.
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Considerations:
- Long-term annualized returns provide a clearer expectation of future performance than short-term returns. It's essential to align investments with goals, time frames, and risk tolerance.
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FAQs:
- The article also touches upon differences between ETFs and mutual funds, highlighting ETFs' exchange-traded nature and tax differences. It explains money market mutual funds as safer investments focusing on short-term, low-risk securities.
Understanding these aspects can help investors make informed decisions, considering their financial objectives and risk appetite. This knowledge allows for better comparisons between different investment options and guides in selecting suitable funds aligned with one's investment goals.
