What Is the Average Mutual Fund Return on Investment?

editorial independenceWe want to help you make informed decisions. Some links on this page — clearly marked — may direct you to a partner website and may result in us earning a referral commission. For more information, see How we make money.

Mutual funds are one of the most popular investment vehicles on the market thanks to their diversification, meaning your money is spread across hundreds or thousands of companies. This protects your investments from any downturn in the market, helping you build wealth. Rather than investing in individual stocks, mutual funds allow you to easily invest across the entire stock market — or just one sector — by investing in just one mutual fund. And with just a few mutual funds, you can build a well-diversified portfolio with multiple asset classes and broad market exposure.

But you may be wondering, as with any other investment, what returns you can expect when investing in mutual funds. Experts agree that investing is the key to building wealth, but as with any investment, there are risks. Mutual funds typically outweigh most risks because of their diversification. We spoke with some financial industry experts to find out what the average return is for mutual funds and how that return compares to other types of investments.

Average return for mutual funds

There are more than 7,500 mutual funds that span a variety of sizes, investment styles, sectors, and more. As a result, it would be impossible to establish a so-called “normal” or average return that would apply to any mutual fund. Instead, the returns you can expect will depend on the type of mutual fund you invest in.

“When people talk about ‘average returns,’ they usually refer to a particular benchmark, such as the S&P 500 index,” said Ryan Ortega, financial advisor and founder of Third line financial planning in Los Angeles.

According to the US Securities and Exchange Commission, the stock market has an average historical return of about 10% per year† However, that only tells you what kind of return you would expect if you invested in a total market mutual fund.

When you add other types of mutual funds to the mix, the average returns can look very different. After all, some mutual funds are made up of fixed income assets with historically lower returns than the stock market. On the other hand, you can also have a mutual fund filled with small-cap stocks, which are known for greater volatility but higher growth potential.

Average returns also differ from active to passive funds. A passive fund – also known as an index fund – is a fund that tracks the performance of a particular index. An active fund, on the other hand, has a fund manager who actively manages it and chooses the investments. Historically, passive funds have tended to: surpass be consistently active, especially over a longer time horizon.

Ultimately, there is no single average return that we can apply to all investment funds. Instead, it’s important to consider your required return – that is, the return you need to meet your financial goals – and the types of funds you invest in.

“One problem we run into is that we read different articles and see different quotes,” Ortega said. “Maybe we’ll see the stock market up 8% over the years.”

But according to Ortega, simply comparing that benchmark number to your portfolio isn’t enough, and if your portfolio falls short, assume you’ve done something wrong.

“First, we need to understand the time frame where that number comes from. What start date are they on? Understand whether that number is looking at stocks and bonds or just bonds. Then, if you compare it to your portfolio, you can see what assets your portfolio owns.” compared to that benchmark.

Average return per sector

As we mentioned, one of the factors that influence the returns of mutual funds is the industry in which they invest. Some mutual funds cover all 11 stock market sectors, while others may focus on just one.

Over time, the returns of one sector can differ significantly from the returns of another. For example, according to data from the S&P Dow Jones indices, in the 12 months leading up to February 2022, the energy sector highest efficiency, with an annual average of 53.67%. By contrast, the communications services sector had an average annual return of 3.64% negative.

If you had invested in only one of these sectors, your portfolio would have performed either very well or very poorly. However, we can never know in advance which sectors will perform well. As a result, financial experts generally recommend a diversified portfolio that includes exposure to all sectors, so you can take advantage of big gains while shielding yourself from the effects of big losses.

Pro tip

If you are new to investing, consider choosing a mutual fund with a target date or one that tracks the overall stock market. You have a broad market exposure and a portfolio that keeps pace with the market, which can help you build wealth.

Mutual Fund Returns vs. Individual Stocks

Many investors choose to invest in individual stocks rather than mutual funds, but many experts disagree with this financial move. When we look at individual stocks, it becomes even more difficult to identify an average return. Like the various sectors we’ve discussed, some stocks will outperform the market, while others will drastically underperform.

One of the benefits of investing in mutual funds is that you get many of the benefits of investing in individual stocks. But instead of buying just one or a few individual stocks, you are buying hundreds or thousands. You profit from those stocks that match or outperform the market. And at the same time, the underperforming stocks don’t make up enough of your portfolio to do real damage. That’s why diversification is so important.

It’s also important to note that mutual funds offer more exposure, not only in the number of stocks in your portfolio, but also in other assets. When you build your portfolio with individual stocks, you only have stock exposure and as a result, your portfolio is likely to take a big hit if the stock market falls.

But a more diversified portfolio of mutual funds can also include bonds, commodities, and more. As a result, when the stock market is low, you can have investments that outperform and can help reduce some of the volatility in your portfolio.

Mutual Fund Returns vs. ETFs

Mutual funds and exchange-traded funds (ETFs) are similar in that they are both pooled investments that hold a large number of underlying assets. They can either track the performance of a particular index or be managed by a professional fund manager.

The main difference between mutual funds and ETFs is the way they trade. An ETF trades in the same way as a stock, while trading on a mutual fund works a little differently.

“A key difference between mutual funds and ETFs is that while end-of-the-day mutual funds only trade once a day, ETFs trade throughout the day,” said Dann Ryan, a CFP and the founder of Sincere advice† “So while this means you get one price per day for a mutual fund, you get a lot for an ETF.”

When you decide to invest in a particular index, you will often find both mutual funds and ETFs for that index. For example, there are S&P 500 mutual funds and ETFs, and they both hold the same underlying assets.

The biggest difference in your returns when you have a comparable mutual fund and ETF will probably come down to cost. For example, Vanguard’s S&P 500 mutual fund has an expense ratio of 0.04%, while the S&P 500 ETF has an expense ratio of 0.03%. The difference between the two is so minimal that you hardly notice it in your returns. But if you had expense ratios that were significantly further apart, the difference between your returns would also be greater.

Additionally, as we mentioned, both mutual funds and ETFs can be active or passive, and each fund has its own strategy and prospectus. If you are going to compare the returns of a mutual fund to that of an ETF, be sure to compare funds with a similar asset allocation.

Mutual Fund Returns vs. Hedge Fund Returns

A hedge fund is an investment vehicle used by high net worth individuals, where they pool their money to invest in higher risk opportunities.

While the goal of a mutual fund is often to match the returns of the stock market, the goal of hedge funds is to beat it. However, in exchange for those higher potential rewards, investors must also accept above-average risk. As a result, hedge fund investments are generally only available to accredited investors, i.e. high income or high net worth investors.

Like individual stocks and sectors, investing in hedge funds offers little predictability. In any given year, you will likely have some hedge funds that are drastically outperforming the market and others that are drastically underperforming. And at the beginning of the year you don’t know what’s what.

When considering adding mutual funds or hedge funds to your portfolio, it’s probably not an either-or decision. Instead, experts generally recommend allocating the majority of your portfolio to diversified investments such as mutual funds, leaving only a small portion for speculative investments, including hedge funds or other types of investments such as cryptocurrency.

Related Posts

Leave a Reply

Your email address will not be published.