Mutual funds can be an option if you’re looking for actively managed funds that are low risk and fairly diversified.
When compared to index funds, though, there’s a clear winner.
With mutual funds, you have to pay a higher expense fee. That’s because the fund is actively managed by fund managers. But with index funds, the fees are much lower because those funds track an index like the S&P 500.
Also index funds regularly outperform actively managed funds. After all, fund managers are just humans who have to use their judgement to see what might perform well. That means they’re often susceptible to error.
That’s why we recommend you pick some reliable and historically well-performing index fund (more on this later). But if you want to consider mutual funds, here’s a good place to start.
The Best Mutual Funds Table of Contents:
The 5 Best Mutual Funds Vanguard Wellington Fund Investor SharesVanguard Health Care Fund Investor SharesFidelity Magellan T. Rowe Price New Horizons Fund Fidelity Select Software & IT Services Fund How Mutual Funds Work How to Choose the Best Mutual Funds
The 5 Best Mutual Funds
Keep in mind that this isn’t a list of the best mutual funds performing at the very moment that you’re reading this. Rather it’s a list of the mutual funds that fit two criteria for us:
Overall performance. This is performance in the long term, over a period of decades.Good banks. The funds come from banking institutions we trust and can rely on.
Also note that all of the information below was written as of early 2020. With that in mind, here are our five favorite actively-managed mutual funds.
Minimum investment: $3,000Expense ratio: 0.25%1-year return: 7.55%3-year return: 8.13%5-year return: 9.90%10-year return: 9.61%Lifetime return: 8.29%Yield: 1.59%
Started in 1929, the Vanguard Wellington Fund is the bank’s oldest mutual fund and the nation’s oldest balanced fund. It’s a fund that has seen the country’s biggest economic downturns from the Great Depression to the Great Recession—and for good reason.
In terms of asset allocation, the fund is moderately balanced including plenty of dividend-paying stocks as well as high-quality bonds. Overall, it’s a very well-balanced mutual fund designed to lower risk.
Minimum investment: $3,000Expense ratio: 0.32%1-year return: 25.79%3-year return: 10.41%5-year return: 9.63%10-year return: 14.98%Lifetime return: 16.06%Yield: .85%
This is a fantastic mutual fund with domestic and international investments in the healthcare sector. This includes things like medical supply companies, hospitals, and also pharma companies.
It has returned an average 16.06% in annual gains since its inception in 1984 and continues to perform well today. And with a low expense ratio of .32%, you don’t have to worry about being nickel-and-dimed by management fees.
Minimum investment: $0Expense ratio: 0.77%1-year return: 27.67%3-year return: 16.35%5-year return: 16.27%10-year return: 13.93%Lifetime return: 16%Yield: 0.24%
This is a very popular mutual fund with investments in large-growth companies—and for good reason. Throughout the 1980s, famed investor Peter Lynch managed the fund to great success, averaging an annual return of 29.2%.
Since its inception in 1963, this fund has had some solid annual returns—often beating the S&P 500 as an investment (not that it matters too much).
Minimum investment: $2,500Expense ratio: 0.76%1-year return: 47.98%3-year return: 26.74%5-year return: 23.73%10-year return: 20.88%Lifetime return: 12.30%Yield: 0%
The T. Rowe Price New Horizons Fund is a good fund that focuses on small- and mid-cap growth, investing in small but quickly growing companies. This includes companies that are developing new and innovative technologies as well as other products that are expected to be popular.
One interesting thing to note about New Horizons is that it also includes investments in private companies—those are companies that don’t offer shares to the public (yet). These companies include the note-taking app Evernote.
This fund is currently closed to new investors, but it may reopen in the future.
Minimum investment: $0Expense ratio: 0.71%1-year return: 41.70%3-year return: 26.84%5-year return: 26.32%10-year return: 21.56%Lifetime return: 16.70%Yield: 0.74%
This fund invests in some of the biggest tech and software companies out there including Microsoft, Visa, Adobe, and Google. Typically, about 80% of the assets are in tech companies.
And if you’re wondering how this fund has fared throughout the years, have no fear. It’s survived the Tech Bubble Burst of the early 2000s as well as the 1987 stock market crash. Overall, it’s a great fund with high returns that has a proven track record of weathering the worst financial storms.
Bonus: Want to turn your dream of working from home into a reality? Download my Ultimate Guide to Working from Home to learn how to make working from home work for YOU. [/yellowbox
How Mutual Funds Work
Think of a mutual fund as a basket. In this basket are many different types of investments (e.g. stocks and bonds).
You and other investors pool your money together to invest in this basket—otherwise known as a portfolio.
That allows you to invest in portfolios you wouldn’t otherwise be able to afford alone. That’s because you’re investing with other people as well.
They’re great because investors can pick a single portfolio that contains many different types of stocks, bonds, and other securities. That’s also known as diversification and lowers your overall risk when investing.
And there are many different types of mutual funds too:
Stock funds. These are funds that invest primarily in stocks. Typically, the funds fall into smaller categories named for the size of the organizations they invest in. For example, there are small-, mid-, and large-cap funds.Bond funds. These are funds that invest primarily in bonds. As such, they’re typically seen as safer, lower risk investments.Balanced funds. These are funds that invest in both stocks and bonds. Their goal is to maintain a specific asset allocation between stocks and bonds. For example, there are target-date funds that automatically readjusts your asset allocation as you get closer to retirement age.Index funds. These fund track indexes such as the S&P 500 and the Dow Jones Industrial Average. These are incredibly popular funds due to their consistency and their low expense ratios. After all, they don’t require a fund manager since they just track and index.
REMEMBER: People often refer to actively-managed funds when they talk about mutual funds—even though index funds are technically mutual funds as well.
Mutual funds typically pay out two ways for investors:
Distributions. This is when a mutual fund has an asset that pays dividends such as stocks.Capital gains. This is when you sell your mutual fund for more than you bought it for.
If you have an actively-managed fund, I wouldn’t bet on it beating the market though. In fact, 66% of large-cap active managers failed to beat the S&P 500.
Does that mean you should avoid getting mutual funds though? Not necessarily.
How to Choose The Best Mutual Funds
The best mutual funds are index funds.
Low cost. The expense ratio for index funds is incredibly low. For example, Vanguard’s 500 Index Fund has an expense ratio of just 0.04%.No active manager. Since they just track an index, that means they’re not prone to the mistakes that a human money manager makes.Historically successful. Even when the S&P 500 has a down year, the market always bounces back up. Don’t believe me? There’s more than 100 years of evidence to support this.
Which index funds should you get? Here are a few of the most popular ones out there:
Vanguard 500 Index Fund Admiral Shares (VFIAX)Vanguard Total Bond Market Index Fund Admiral Shares (VBTLX)Vanguard Total Stock Market Index (VTSMX)Schwab S&P 500 Index Fund (SWPPX)Fidelity Spartan 500 Index Fund (FXAIX)
Index or Mutual Funds?
Mutual funds are a relatively low-risk way to start investing for your future. They’re great if you like a hands-off, diversified style of investing.
But investors should be wary of any actively-managed funds. After all, they’re managed by humans and humans are prone to mistakes.
That’s why we suggest you invest in an index fund that tracks an index for you. This takes the guesswork out of investing. It also has a historical track record of success—even in the worst economic disasters of our time.
For more on mutual funds, be sure to check out our article all about mutual funds here.
Read more: iwillteachyoutoberich.com