What Is the Average Mutual Fund Return?

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For individuals looking to invest without spending hours on research, mutual funds might be the solution. Here’s a full breakdown of mutual funds, average mutual fund returns and how they work as a long-term investment opportunity.

What Is a Mutual Fund?

A mutual fund is a portfolio of assets overseen by professional money managers. Mutual funds act as a vehicle for people to get exposure to capital markets and, ideally, to earn a return on the amount invested. They are typically operated by large investment companies such as Fidelity Investments or Vanguard and are not available on the open market.

What Are the Types of Mutual Funds?

Mutual funds have different characteristics based on their overall goals — some may aim for wealth preservation, and others may aim for growth using a high-risk, high-reward strategy.

Typical mutual funds include:

  • Money market funds
  • Stock funds
  • Bond funds
  • Target date funds

Benefits and Risks of Mutual Funds

Mutual funds attract investors based on their ability to earn a return. This can come in the form of a dividend payment, capital gains by the fund or an increase in the net asset value of holdings. However, there is no guarantee of returns, and choosing to invest in mutual funds can result in partial or permanent loss of the amount invested.

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What To Know Before Investing in Mutual Funds

Mutual funds often carry fees that are known as the expense ratio. Investors forfeit their shareholder voting rights in relation to any underlying securities held in the portfolio.

What Is the Average Rate of Return on a Mutual Fund?

Generally, stock mutual funds attempt to beat the returns of the S&P 500, which historically has produced 10.70% in its 65-year history. However, the majority of funds do not beat the benchmark. Roughly 79% of mutual funds underperformed the S&P 500 in 2021, a figure that has grown 86% in the past 10 years. 

Returns can also vary drastically, as funds target many different assets, sectors and companies of different sizes — as is the case with stock market mutual funds. For example, the energy sector has performed extremely well in 2022. A mutual fund heavily weighted toward energy is likely to be outperforming other funds with no energy exposure.

What Is a Good 10-Year Return on a Mutual Fund?

The best-performing large-company stock mutual funds have produced returns of up to 17% in the last 10 years. It should be noted that average annualized returns have been higher than usual — at 14.70% during this time frame — driven by a multi-year bull market. A good return would be one that consistently outperforms its benchmark. However, most do not. 

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What Is the Average Mutual Fund Return Over the Last 20 Years?

High-performing large-company stock mutual funds have produced returns of up to 12.86% in the last 20 years. Comparatively, the S&P 500 has produced returns of 8.13% since 2002.

Are Mutual Funds a Good Option?

Mutual funds can be a good choice depending on an investor’s profile. Key characteristics to weigh include management’s professionalism, track record, time horizon and associated costs as well as diversification. Here’s a comparison of some other options and how they stack up.

Mutual Funds vs. ETFs

The main difference between mutual funds and exchange-traded funds is liquidity. ETFs are openly traded on stock markets, which allows them to be bought and sold just like individual stocks. As such, ETFs can be sold short. They also tend to have lower fees than mutual funds.

Mutual Funds vs. Hedge Funds

The main difference between mutual funds and hedge funds is access. Generally, hedge funds are only available to accredited investors and carry a much higher risk than traditional mutual funds. This is because hedge funds also take short positions and invest in volatile derivatives such as options contracts.

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Final Take

Mutual funds can be a great way for people to get exposure to more risk assets if they want to preserve or grow wealth. Anyone investing in a mutual fund should be aware of the costs associated and know their own time horizon and risk tolerance prior to investing.

FAQ

Here are some questions people ask about mutual funds.
  • What are the top mutual funds?
    • Top-performing mutual funds include Shelton Funds and Fidelity Investments. The Shelton Capital Nasdaq-100 Index Direct and the Fidelity Growth Company mutual funds have returned 13.16% and 12.86% respectively over the past 20 years.
  • What mutual funds can you invest in?
    • Different types of mutual funds include equity funds, bond funds, balanced funds, money market funds and more. More than 7,000 active mutual funds were operating in the U.S. in 2021.

Data is accurate as of July 13, 2022, and is subject to change.

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About the Author

David is a qualified financial advisor in the Republic of Ireland. He has a bachelor's degree in business and entrepreneurship, as well as over five years of investing experience.

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