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How good a job has your mutual fund manager been doing for you?
Mutual funds are pools of money contributed by lots of investors and managed by a fund manager. Fund managers invest the pooled money in a wide variety of assets, depending on the nature of the fund. A specific fund can be invested in stocks, bonds, currencies, specific economic sectors, or unique geographic area and each fund’s particular focus will be set out in its prospectus. Mutual funds permit individual investors an opportunity to invest in a wide range of assets within any given fund from one platform. Even a narrowly focused fund will hold a vast number of different assets.
How mutual funds reward investors
The goal of a mutual fund is to generate income or capital gains. Investors earn returns in three ways:
- Dividends on stocks and interest on bonds in the fund’s portfolio which is paid to fund owners in a yearly distribution.
- Capital gains, which are generated when the fund manager sells shares for a price higher than they were purchased for. Those capital gains are paid to the fund’s investors in a distribution.
- The total combined value of a fund’s holdings can increase even if they are not sold by the fund manager. If the holdings aren’t sold, no capital gains are generated, but the increased value of the fund’s assets is reflected in an increase in the share price for each unit of the fund. Investors can cash out and collect that profit by selling shares in the mutual fund.
What is the average return on a mutual fund investment?
That’s a huge question, and the answer requires a bit of nuance and a lot of context. Remember, there are multiple types of mutual funds, and some people hold their fund units for short periods or for the long term.
The closest answer to the question comes from using data from the website thebalance.com. The resource, based on information as of October 21st, 2019 shows the seven main categories of mutual funds. It also gives the average return within those types of funds so far this year (“year to date” a.k.a. YTD), and over the past three, five, 10 and 15 years. Lastly, it also indicates whether the returns are good or bad requires consideration of a benchmark.
U.S. Large-Cap Stocks
- Average return YTD 19.23%
- 3-year average return 12.4%
- 5-year average return 10.28%
- 10-year average return 11.47%
- 15-year average return 8.22%
U.S. Mid-Cap Stocks
- Average return YTD 17.08%
- 3-year average return 9.02%
- 5-year average return 7.58%
- 10-year average return 10.58%
- 15-year average return 8.09%
Mutual funds permit individual investors an opportunity to invest in a wide range of assets within any given fund from one platform. Even a narrowly focused fund will hold a vast number of different assets.
U.S. Small-Cap Stocks
- Average return YTD 13.93%
- 3-year average return 7.92%
- 5-year average return 7.36%
- 10-year average return 10.38%
- 15-year average return 7.93%
International Large-Cap Stocks
- Average return YTD 13.84%
- 3-year average return 6.87%
- 5-year average return 4.64%
- 10-year average return 4.39%
- 15-year average return 5.11%
Long-Term Bonds
Bond funds invest primarily in bonds issued by governments, municipalities, and corporations. They may also invest in other debt instruments such as mortgage-backed securities. A long-term fund invests in bonds that mature over more than 10 years, on average.
- Average return YTD 17.98%
- 3-year average return 5.91%
- 5-year average return 5.58%
- 10-year average return 7.23%
- 15-year average return 6.38%
Intermediate-Term Bonds
Intermediate-term bond funds invest in bonds that mature over between five and ten years, on average.
- Average return YTD 7.71%
- 3-year average return 2.73%
- 5-year average return 2.65%
- 10-year average return 3.56%
- 15-year average return 3.82%
Short-Term Bonds
Short-term bond funds invest in bonds that mature in less than five years, on average.
- Average return YTD 4.19%
- 3-year average return 2.17%
- 5-year average return 1.8%
- 10-year average return 2.21%
- 15-year average return 2.60%
A deeper dive — related reading from the 101:
– How to decide if a mutual fund or annuity is right for your retirement | Finance 101
There are a lot of investment options out there. Choosing the best one for you requires research.
– 5 best funds to buy for a slow economy | Finance 101
Much as we wish it weren’t so, the economy isn’t always booming? Where should you invest when it’s slow?