As you build your investment portfolio, you may consider adding mutual funds to the mix. Looking at average mutual fund returns first can help you decide where to invest your money.
Average mutual fund returns — and how to estimate your own
The average mutual fund return for 2021 was 10.16%. However, average returns aren’t this cut and dried. For a more accurate estimate, you need to look at two factors.
1. Types of assets held in the fund
Average mutual fund returns vary significantly based on the range of assets held in the fund. For example, large-cap stock mutual funds that mimic the S&P 500 saw an average gain of 27.01% last year. Meanwhile, long-term bond mutual funds had a -2.66% loss.
2. Historical time period you’re looking at
Historical time periods also affect average mutual fund returns. Last year, mutual funds as a whole had an average return of around 10.16%. But when you zoom out to a 15-year time period, that average drops to 6.39%.
Same goes for long-term bond mutual funds: While this type of fund had an average return of -2.66% last year, its 15-year average is 6.19%.
Past returns are no indication of future results. However, it’s a good idea to review average mutual fund returns from a multiyear perspective. The further you can zoom out, the better you can determine long-term stability.
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Annualized vs. annual return
You’ll often see mutual fund returns expressed as annual returns or annualized returns:
- The annual return of a mutual fund is its average gain or loss over a one-year period.
- An annualized return is the average gain or loss over a multiyear period.
Say a fund has an average return of 10% in Year 1. Its annual return is 10%.
Now let’s say that the same fund has an average return of 5% in Year 2, 8% in Year 3 and -2% in Year 4. Its annualized return over that four year period would be 5.25%:
(10 + 5 + 8 + -2) / 4 = 5.25%
Average mutual fund returns in 2021 and over the long term
This table breaks down average mutual fund returns by category. We use Vanguard index mutual funds to calculate each average.
| Fund category | YTD 2021 | 3-Year | 5-Year | 10-Year | 15-Year |
|---|---|---|---|---|---|
| US large-cap stock | 27.01% | 18.90% | 15.98% | 14.55% | 10.34% |
| US mid-cap stock | 24.51% | 15.67% | 13.00% | 12.94% | 9.52% |
| US small-cap stock | 17.73% | 13.16% | 11.34% | 12.11% | 9.24% |
| International large-cap stock | 7.97% | 7.10% | 6.36% | 5.78% | 2.90% |
| Long-term bond | -2.66% | 4.23% | 4.61% | 4.75% | 6.19% |
| Intermediate-term bond | -2.36% | 1.38% | 1.70% | 2.33% | 4.22% |
| Short-term bond | -1.08% | 0.95% | 1.17% | 1.19% | 2.35% |
| Mean | 10.16% | 8.77% | 7.74% | 7.66% | 6.39% |
How to calculate your mutual fund’s annual return
If you don’t want to use an online calculator, you can calculate a mutual fund’s annual return with this formula:
(ending fund price – beginning fund price) / beginning fund price = annual return
Say a mutual fund cost $100 on January 1 and $125 on December 31. Its annual return would be 25%:
(125 – 100) / 100 = 0.25 or 25%
Mutual funds vs. other investments
Here’s a closer look at how average mutual fund returns compare to ETFs, stocks and CDs:
- Mutual funds vs. ETFs. Mutual funds and ETFs usually have similar returns. However, mutual funds can have higher fees because they’re actively managed by experts, instead of passively managed by you.
- Mutual funds vs. stocks. In general, stocks may have higher returns than mutual funds. But they carry more risk, because they lack diversification.
- Mutual funds vs. CDs. Even the best CD rates top out around 1%, so you’ll likely find higher returns with mutual funds. That said, CDs can’t lose value like mutual funds can, so they’re worth considering against your goals.
4 factors to consider before choosing a mutual fund
Mutual funds can be a great part of any retirement planning strategy. Before you invest in them, check these items off your to-do list:
- Review long-term returns. While past performance is no indicator of future results, it can be helpful to look at how a particular mutual fund has performed over the past 15 years or so.
- Choose a benchmark. A benchmark gives context to how a mutual fund is performing relative to the index it’s in. For instance, if the S&P 500 returns 8% and a large-cap stock fund returns 10%, then the fund has an “above average” return for its benchmark.
- Look at returns by category. Say you’re looking at large-cap stock mutual funds. How does the one you’re interested in compare to other large-cap funds? Knowing these stats can help you choose the best mutual fund for you.
- Understand expense ratios and other fees. An expense ratio tells you how much you’ll pay per year for a mutual fund. For instance, a 0.5% expense ratio means you’ll pay $5 for every $100 invested. Also understand the six other mutual fund fees to watch out for.
5 steps to invest in a mutual fund
You can invest in a mutual fund in minutes online using these five general steps:
- Open an online brokerage account if you don’t already have one.
- Research which mutual fund you’d like to buy.
- Search for that mutual fund in your trading platform.
- Select the number of shares you want to buy.
- Follow the on-screen instructions to complete your order.
Mutual funds a top choice for investors
Mutual funds are one of the more popular options with investors, with 42% choosing to put their money in a mutual fund. This is only behind those buying individual stocks (45%).
Compare trading platforms
You’ll need a brokerage account to invest in mutual funds. Use this table to compare your options and find the best platform based on features, fees and investor feedback.
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