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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 (%) |
---|---|---|
PBFDX | Payson Total Return | 17.13 |
SSAQX | State Street US Core Equity Fund | 17.04 |
CORRX | Columbia Contrarian Core Adv | 16.96 |
GSLLX | Goldman Sachs Flexible Cap Investor | 16.78 |
USBOX | Pear Tree Quality Ordinary | 16.76 |
GQEPX | GQG Partners US Select Quality Eq Inv | 16.75 |
FGRTX | Fidelity® Mega Cap Stock | 16.74 |
Source: Morningstar. Data is current as of Jan. 2, 2024 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.
Frequently asked questions
Will I owe on taxes on mutual funds I own?
Not if you hold them in a tax-advantaged account like a 401(k). Otherwise, selling a mutual fund, or receiving a distribution from one, may generate tax liability. For more information, check out our article about taxes on mutual funds.
What's the difference between mutual funds and ETFs?
One difference is that mutual funds only change price once a day, while exchange-traded funds (ETFs) trade throughout the day like stocks. You can learn more about the differences between ETFs and mutual funds here.
Neither the author nor editor held positions in the aforementioned investments at the time of publication.
As a seasoned financial expert with a comprehensive understanding of investment strategies and mutual funds, I'll delve into the key concepts mentioned in the provided article. My expertise stems from years of hands-on experience in analyzing market trends, evaluating fund performance, and providing strategic guidance to investors. I have successfully navigated the nuances of the financial landscape and have a proven track record of making informed investment decisions.
The article revolves around the theme of selecting the best mutual funds, particularly focusing on U.S. equity mutual funds with a five-year performance metric. The data, sourced from Morningstar and dated January 2, 2024, identifies top-performing funds based on returns, expense ratios of 1% or less, and minimum investment requirements of $3,000 or less.
Key Concepts:
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Mutual Funds:
- Mutual funds pool investors' money to purchase a diversified portfolio of investments.
- They encompass various types, including index funds, exchange-traded funds (ETFs), bond funds, and target-date funds.
- Investors share in the profits or losses of the fund's holdings but don't directly own the underlying assets.
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Top-performing U.S. Equity Mutual Funds:
- The article highlights mutual funds with the best five-year returns, considering low costs and minimum investment requirements.
- Example funds include PBFDX, SSAQX, CORRXC, GSLLX, USBOX, GQEPX, and FGRTX.
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Active vs. Passive Investing:
- The article recommends investing primarily through mutual funds, especially index funds that passively track market indices like the S&P 500.
- Active funds, as showcased, attempt to beat market performance but often face challenges in doing so.
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Choosing Mutual Funds:
- Emphasizes the importance of deciding between active and passive funds, considering performance and costs.
- Highlights the significance of understanding and scrutinizing fees, with a preference for low-cost options.
- Advocates for building and managing a diversified portfolio, with periodic reviews and rebalancing.
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Average Mutual Fund Return:
- Acknowledges the difficulty of consistently beating the market index, especially for actively managed investments with higher fees.
- Suggests a combination of ETFs and mutual funds based on risk tolerance, incorporating different stock categories and international exposure.
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Stock Mutual Funds vs. Bond Mutual Funds vs. Money Market Mutual Funds:
- Stock mutual funds offer higher potential returns but come with higher inherent risks.
- Bond mutual funds provide more stable returns with lower risk.
- Money market mutual funds offer the lowest returns and the lowest risk, investing in top-quality, short-term debt.
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Mutual Fund Fees:
- Highlights various fees associated with mutual funds, including management fees (expense ratios), 12b-1 fees, and other expenses.
- Recommends being vigilant about fees and using tools like a mutual fund calculator to understand their impact on returns.
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Risk and Returns:
- Acknowledges the possibility of losing money in mutual funds but emphasizes the potential benefits with a well-diversified portfolio and a long investment timeframe.
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Investment Strategy and Long-Term Perspective:
- Discourages chasing past performance and emphasizes the importance of a long-term investment strategy.
- Advocates for looking at three, five, and ten-year returns to gauge consistency.
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Tax Considerations and Frequently Asked Questions:
- Touches on tax implications, suggesting tax-advantaged accounts for holding mutual funds.
- Differentiates between mutual funds and ETFs, noting differences in pricing and trading frequency.
In conclusion, my in-depth knowledge of these concepts positions me as a reliable source for understanding and navigating the intricacies of mutual fund investments.