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Written by James Royal, Ph.D. Brian Baker, CFA
Edited by Mercedes Barba
Reviewed by Robert R. Johnson
Edited by Mercedes Barba
Reviewed by Robert R. Johnson
As of December 01, 2023
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.There are thousands of funds to choose from, so Bankrate has highlighted some of the best mutual funds based on Morningstar research.
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On This Page
- Best mutual funds
- What are the pros and cons of mutual funds?
- How to pick the best mutual funds for your portfolio
- Types of mutual funds
- Active vs. passive mutual funds
- Alternatives to mutual funds
- Mutual funds vs ETFs
- Can you lose money in a mutual fund?
- Related content
Top performing low-fee mutual funds
Below are some of the best mutual funds, with performance data as of Nov. 30, 2023.
- Shelton Nasdaq-100 Index Investor (NASDX)
- VALIC Company I Nasdaq 100 Index (VCNIX)
- Voya Russell Large Cap Growth Index Fund (IRLNX)
- Fidelity Large Cap Growth Index (FSPGX)
- TIAA-CREF Large-Cap Growth Index Fund (TRIRX)
- Fidelity U.S. Sustainability Index Fund (FITLX)
- T. Rowe Price U.S. Equity Research Fund (PRCOX)
- Voya Russell Large Cap Index Portfolio (IIRLX)
Shelton Nasdaq-100 Index Investor (NASDX)
This fund tries to replicate the performance of the Nasdaq-100 index.
- 2023 YTD performance: 46.8 percent
- Historical performance (annual over 5 years): 18.9 percent
- Expense ratio: 0.50 percent
VALIC Company I Nasdaq 100 Index (VCNIX)
This fund tracks the performance of the Nasdaq-100 index.
- 2023 YTD performance: 46.7 percent
- Historical performance (annual over 5 years): 18.7 percent
- Expense ratio: 0.44 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.
- 2023 YTD performance: 40.5 percent
- Historical performance (annual over 5 years): 17.4 percent
- Expense ratio: 0.43 percent
Fidelity Large Cap Growth Index (FSPGX)
This fund typically invests at least 80 percent of its assets in the broadly diversified Russell 1000 Growth index of large-cap stocks.
- 2023 YTD performance: 36.7 percent
- Historical performance (annual over 5 years): 16.6 percent
- Expense ratio: 0.035 percent
TIAA-CREF Large-Cap Growth Index Fund (TRIRX)
This fund tracks the Russell 1000 Growth Index, which includes large, fast-growing domestic companies in the Russell 1000 Index.
- 2023 YTD performance: 36.3 percent
- Historical performance (annual over 5 years): 16.2 percent
- Expense ratio: 0.30 percent
Fidelity U.S. Sustainability Index Fund (FITLX)
This fund tracks the MSCI USA ESG Index, which includes large- and mid-cap U.S. stocks that score relatively high on ESG (environment, social and governance) measures.
- 2023 YTD performance: 23.3 percent
- Historical performance (annual over 5 years): 13.3 percent
- Expense ratio: 0.11 percent
T. Rowe Price U.S. Equity Research Fund (PRCOX)
This fund focuses primarily on large-cap U.S. stocks with a sector weighting similar to the S&P 500 index, but it may also invest in small-cap, mid-cap and foreign stocks.
- 2023 YTD performance: 23.5 percent
- Historical performance (annual over 5 years): 13.3 percent
- Expense ratio: 0.45 percent
Voya Russell Large Cap Index Portfolio (IIRLX)
The fund targets returns that correspond to the total return of the Russell Top 200 Index.
- 2023 YTD performance: 24.0 percent
- Historical performance (annual over 5 years): 13.2 percent
- Expense ratio: 0.36 percent
What are the pros and cons of mutual funds?
Pros
Diversification — Mutual funds allow you to achieve a diversified portfolio quite easily. For an initial investment of a few thousand dollars you can buy into a fund that contains hundreds of different securities.
Portfolio management — When you invest in a mutual fund, you won’t have to worry about making changes if one stock does better than another or vice versa. The fund’s portfolio manager handles decisions like that and you can mostly relax.
Can be low cost — You can get the benefits of mutual fund investing for a low annual fee, but be careful to do your research before deciding to invest. Some funds, such as actively managed funds, could come with an expense ratio of 1 percent or higher, while index funds could cost less than 0.1 percent each year. If cost matters to you, it’s probably better to choose an index fund.
Reinvestment — Dividends that the fund earns can easily be reinvested into more shares of the fund, allowing your investment to continue to compound over time.
Cons
High initial investment — Compared to ETFs, mutual funds have a high initial investment, typically a few thousand dollars.
Fees and sales charges — Mutual funds can come with high expense ratios, but you’ll also want to watch out for sales charges that may be included when you purchase or sell a fund.
Tax events — If you hold mutual fund shares in non-retirement accounts, you may be surprised to get a capital gains distribution from the fund. You have no control over the size of the distribution, so it’s best to own mutual funds in retirement accounts where you won’t have to worry about the taxes.
Limited trading — Mutual funds are only bought and sold at the end of the trading day once their NAV is calculated.
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 infinding the best mutual fundfor 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 the more appropriate 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 thefund chargefor 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 asindex 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 indexwill have substantially the same holdings as another, so the real basis for comparison is the fund’s fees. As the old investor saying goes, “Fees are certain but returns are not.”
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.
Active vs. passive mutual funds
Active funds
Active fundsattempt to outperform market benchmarks,such as the S&P 500, by analyzing stocks and trying to pick the ones that will earn the highest returns for the fund. Because these funds have teams of portfolio managers and analystsanalyzing investment opportunities, they cost more than passively managed funds.
Passive funds
Passive funds, on the other hand, do not attempt to outperform a benchmark, but rather aim to equal a benchmark’s performance. These are often calledindex fundsand because no time is spent trying to identify the best stocks to own, the cost to own these funds tends to be significantly lower than an active fund. It should be noted that many active funds not only fail to outperform their benchmarks, but they sometimes generate performance that is below the benchmark. Once costs are added in, investors in active funds are often disappointed.
Alternatives to mutual funds
Exchange traded funds, orETFs, are very similar to mutual funds, but trade more like stocks. You’ll still be purchasing a fund that holds a basket of securities, allowing you to diversify, but you’ll be able to buy that fund throughout the trading day. Mutual funds can only be bought and sold at their NAV, which is calculated at the end of the day. ETFs are also able to be purchased with smaller investments than mutual funds, which typically require a minimum investment of a few thousand dollars.
You could also purchase a basket ofindividual stockson your own, but this might require a sizable investment beyond what’s needed to invest in mutual funds. You may be able to build a portfolio usingfractional shares, but it could be difficult to match the breadth of the portfolios offered by mutual funds without a meaningful investment. In addition, you’ll need to research each company you’re buying and understand their financial and competitive positioning in order to be successful investing. If you are able to build a portfolio of individual stocks, you’ll also need to monitor it and make sure positions don’t grow or shrink to levels you aren’t comfortable with.
If you’re looking for an alternative to money market mutual funds, ahigh-yield savings accountis likely to be a good option. You’ll typically receive interest beyond what’s available in a traditional checking or savings account and as long as your account is with anFDIC-insuredinstitution, your money will be safe up to $250,000 per depositor, per bank.
What’s the difference between mutual funds and ETFs?
Mutual funds and ETFsboth allow investors to purchase diversified baskets of securities at a relatively low cost, but there are some key differences between the two fund-types.
Mutual funds are more likely to be actively managed than ETFs, which is why they come with slightly higher average fees. You could also end up paying a sales commission for some mutual funds. An initial investment of a few thousand dollars is typically required for mutual funds, whereas an ETF can be purchased for the price of one share. Some ETFs allowfractional shares to be purchased, which means you can start investing with just a few dollars.
One of the main differences between mutual funds and ETFs is in the way they’re traded. Mutual funds can only be bought and sold at the end of the day at the fund’s closing NAV, while ETFs trade throughout the day similar to the way stocks trade.
Can you lose money in a mutual fund?
Yes, you can lose money investing in a mutual fund, but it’s important to remember that a mutual fund isn’t an investment in and of itself, but rather a vehicle for investing in assets such as stocks and bonds. If the assets held in the mutual fund decline in value, the mutual fund’s net asset value (NAV) will also decline. Stocks, bonds and other securities can all lose value and there’s nothing unique about the mutual fund structure that would prevent you from experiencing those losses.
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.
Related content: Basics of mutual fund investing
As someone deeply immersed in the field of investing, particularly mutual funds, I can provide valuable insights and analysis into the content you've shared. My expertise encompasses a broad understanding of financial markets, investment strategies, and the nuances of mutual funds.
Firstly, the article you've provided is a comprehensive guide to mutual funds, covering various aspects such as the benefits and drawbacks, how to choose the best funds, types of mutual funds, and a list of top-performing low-fee mutual funds. The information is well-organized and caters to both beginners and seasoned investors.
Let's break down the key concepts discussed in the article:
-
Best Mutual Funds:
- The article lists several mutual funds based on their performance data as of Nov. 30, 2023. Each fund is accompanied by details such as year-to-date performance, historical performance over five years, and expense ratio. This information is crucial for investors to evaluate the funds and make informed decisions.
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Pros and Cons of Mutual Funds:
- The pros highlighted include diversification, professional portfolio management, potential for low cost, and the ability to reinvest dividends. On the flip side, the cons include high initial investment, fees and sales charges, tax events, and limited trading. This balanced view provides readers with a realistic understanding of what to expect when investing in mutual funds.
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How to Pick the Best Mutual Funds:
- The article emphasizes the importance of considering factors like time horizon, risk tolerance, and existing portfolio allocation when selecting mutual funds. It encourages investors to assess a fund's track record, performance consistency, and fees.
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Types of Mutual Funds:
- Mutual funds are categorized into stock funds, bond funds, money market funds, balanced funds, and target date funds. This classification helps investors tailor their investments to specific asset classes based on their financial goals and risk tolerance.
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Active vs. Passive Mutual Funds:
- Active funds aim to outperform market benchmarks through stock analysis, while passive funds, also known as index funds, aim to replicate a benchmark's performance. The article rightly points out the cost differential between the two, with active funds generally incurring higher fees.
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Alternatives to Mutual Funds:
- Exchange-traded funds (ETFs) are introduced as alternatives to mutual funds. The article explains the differences in trading, fees, and minimum investment requirements between the two.
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Mutual Funds vs. ETFs:
- A concise comparison is provided, outlining the similarities and differences between mutual funds and ETFs. Notably, the trading mechanisms and minimum investment requirements distinguish the two investment vehicles.
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Can You Lose Money in a Mutual Fund?
- The article addresses a crucial concern by confirming that investors can indeed incur losses in mutual funds. It clarifies that mutual funds are vehicles for investing in assets like stocks and bonds, which can experience fluctuations in value.
In conclusion, the article is a valuable resource for individuals seeking to understand the intricacies of mutual fund investing. It covers a range of topics with depth and clarity, providing readers with the knowledge needed to make informed financial decisions.
