Mutual funds are one of the most popular ways to invest in the stock and bond markets, especially as part of employer-sponsored 401(k) plans and self-directed IRAs. Mutual funds allow you to buy a diversified collection of assets in just one fund, often at low cost. So you’ll be able to create a diversified portfolio quickly, easily and cheaply.
But with literally thousands of available funds, how do you find the top ones for your portfolio? Below Bankrate has highlighted some of the best mutual funds based on Morningstar research.
Top performing low-fee mutual funds
Bankrate selected its top funds based on the following criteria, and included only funds that were investible for regular investors (i.e., not those with $5 million minimum investments):
- Five-star U.S. stock funds according to Morningstar, for quality
- No sales load (i.e., commission), in order to reduce costs
- 5-year performance better than the Standard & Poor’s 500, which has historically returned about 10 percent annually on average
- An expense ratio less than 0.5 percent, to minimize ongoing costs
- Funds where the manager has been at the helm for more than five years, to ensure stability
- Then we sorted the results by the top performers year to date
Below are some of the best mutual funds, with performance data as of May 27, 2021.
Fidelity Series Intrinsic Opportunities Fund (FDMLX)
This fund invests in medium-sized publicly traded companies that are value priced.
- Performance YTD: 24.2 percent
- Historical performance (annual over 5 years): 15.4 percent
- Expense ratio: 0 percent
Vanguard Windsor II Investor Shares (VWNFX)
This fund invests in large publicly traded companies that are value priced.
- Performance YTD: 18.1 percent
- Historical performance (annual over 5 years): 15.3 percent
- Expense ratio: 0.34 percent
American Century NT Mid Cap Value Fund (ACLMX)
This fund invests in medium-sized publicly traded companies that are value priced.
- Performance YTD: 17.8 percent
- Historical performance (annual over 5 years): 11.8 percent
- Expense ratio: 0.01 percent
Fidelity Small Cap Index (FSSNX)
This fund invests in small publicly traded companies that are included in the Russell 2000 index.
- Performance YTD: 14.3 percent
- Historical performance (annual over 5 years): 16.3 percent
- Expense ratio: 0.025 percent
Vanguard Small Cap Index (VSMAX)
This fund invests in an index of small publicly traded stocks that are growth focused and value priced.
- Performance YTD: 13.8 percent
- Historical performance (annual over 5 years): 15.7 percent
- Expense ratio: 0.05 percent
Best mutual funds for the long term
Using the same criteria as before, Bankrate sifted through funds that had great ten-year track records. Below are some of the best mutual funds, with performance data as of May 27, 2021.
Shelton NASDAQ-100 Index Direct (NASDX)
This fund tries to replicate the performance of the NASDAQ-100 index.
- Performance YTD: 6.7 percent
- Historical performance (annual over 5 years): 25.2 percent
- Historical performance (annual over 10 years): 20.2 percent
- Expense ratio: 0.50 percent
Fidelity NASDAQ Composite Index (FNCMX)
This index fund tracks the performance of the entire NASDAQ stock exchange.
- Performance YTD: 6.9 percent
- Historical performance (annual over 5 years): 23.9 percent
- Historical performance (annual over 10 years): 18.5 percent
- Expense ratio: 0.29 percent
Vanguard U.S. Growth Fund Investor Shares (VWUSX)
This fund invests in large U.S. growth companies.
- Performance YTD: 2.4 percent
- Historical performance (annual over 5 years): 23.7 percent
- Historical performance (annual over 10 years): 17.9 percent
- Expense ratio: 0.38 percent
Voya Russell Large Cap Growth Index Fund (IRLNX)
This index fund tracks the performance of the Russell Top 200 Growth index, which includes large stocks.
- Performance YTD: 7.1 percent
- Historical performance (annual over 5 years): 22.5 percent
- Historical performance (annual over 10 years): 17.6 percent
- Expense ratio: 0.43 percent
Hartford Core Equity R5 (HGITX)
This fund invests primarily in large publicly traded companies that are growth-focused and value-priced.
- Performance YTD: 11.0 percent
- Historical performance (annual over 5 years): 16.9 percent
- Historical performance (annual over 10 years): 15.1 percent
- Expense ratio: 0.48 percent
How to pick the best mutual funds for your portfolio
Choosing the best mutual fund for you depends a lot on what you need, in particular your risk tolerance and time horizon. But it also depends on what else you already have in your portfolio. Here are a few key questions to consider in finding the best mutual fund for you:
- When do you plan to access the money? The longer your time horizon, the more risk you can take, meaning stock funds could be a better investment. If you need the money in the next year or two, you may want to reduce your risk with bond or money market funds.
- Can you withstand temporary losses and hold on? If you can stick with your investing plan for the long term, stock funds will likely be a better investment for you.
- Do you have a specific gap in your portfolio? You may need greater balance in your portfolio. Are you heavily allocated toward bond funds and need some stocks to balance out your returns, or vice versa? Are you invested only in U.S.-based investments and not foreign stocks?
It’s important to know your portfolio and financial situation so that you can assess what mutual fund may be best for you. But even when you find a fund type that you like, you’ll also want to assess which funds are better along a few dimensions.
Ask yourself the following questions:
- What is the fund’s longer-term track record? A higher-performing long-term record (over five or 10 years) is better than a lower one. The fund’s long-term record is your best gauge to how well it may perform in the future.
- Has the fund done well only in the last year or two? A fund that has outperformed only recently may eventually revert to its long-term record. Investors often chase hot performance, then end up buying high and almost inevitably selling low.
- What does the fund charge for investing? Is there a sales load? It’s easy to avoid a sales load, but virtually all mutual funds charge an expense ratio to cover the ongoing costs of the fund and generate a profit.
Some funds (such as index funds) invest in literally the same stocks or bonds as other similar funds. So you can find the same “product” for a lower expense ratio by searching around. For example, any fund based on the Standard & Poor’s 500 index will have substantially the same holding as another, so the real basis for comparison is the fund’s fees.
Sometimes you may have to compare two funds, one with higher long-term performance and a higher expense ratio and the other with lower performance and a lower fee. So consider if paying the higher fees is worth the extra return. One quick method to check: subtract the fund’s expense ratio from its long-term return to see which offers you the best returns after fees.
Certain investors prefer exchange-traded funds over mutual funds – here’s what to consider.
Types of mutual funds
Mutual funds come in a variety of types, and are categorized by the type of investments they own – stock funds, bond funds, money market funds, balanced funds and target date funds.
Stock mutual funds
Stock mutual funds own stocks exclusively, giving them the potential for greater volatility – both higher overall returns and lower overall returns than other types of mutual funds. Included among stock mutual funds are some of the most popular index funds, where the fund is based on the Standard & Poor’s 500 index of top American companies. From here they may be further divided into funds focused on growth stocks, value stocks or some combination of the two.
Bond mutual funds
Bond mutual funds own bonds exclusively, making them generally less volatile than stock funds. But they’re also likely to deliver lower returns over time than their stock-based counterparts.
Money market mutual funds
These mutual funds own safe securities such as cash and very short-term debt, making them generally safer than either stock- or bond-based mutual funds but also lower-return. That said, unlike FDIC-backed money market accounts at a bank, money market mutual funds can lose principal, meaning it’s possible, though not likely, that you won’t get your whole investment back.
Balanced mutual funds
These mutual funds can invest in stocks, bonds and money market instruments, and generally can offer lower volatility in exchange for lower overall returns. How much is allocated to each type of asset class depends on the fund’s investment manager and its expectations for return.
Target-date mutual funds
Target-date mutual funds are popular in 401(k) accounts, and they typically invest in stocks, bonds and money market instruments. Investors pick when they want to access their money (say, at retirement) and then the target date fund selects investments that are appropriate for that time period, reducing risk as the investor nears the target date. Usually this means the fund shifts investments from higher-risk (but high-return) stocks to lower-risk bonds over time.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.