Finding the Best Mutual Funds By Eliminating the Worst

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What are the top 10 best mutual funds of all time? A list like this can be a challenge to complete because there are more than 30,000 funds available to investors, if you include all share classes and Exchange Traded Funds (ETFs). But, if you know what to look for in a mutual fund, arriving at the best can be relatively easy. You can also follow a similar process when searching for the best funds for your own portfolio.

Find the Best Funds by Eliminating the Worst: Here's What to Avoid!

As any good writer of a list like this would do, before I provide the actual list, I will begin the article with my basic criteria for selecting the top 10. Also, just the same as any wise investor will do to find the best funds for their own portfolio, they eliminate the worst funds.

Note: I don't recommend skipping this section, but if you don't have an extra few minutes, you can follow this link to my list of Top 10 Best Mutual Funds.

Here are the types and qualities of funds that I immediately eliminated from the list:

  • Don't Use Load Funds: Mutual fund loads are commissions or fees paid to brokers for buying (front-end load) or selling (back-end load) shares of mutual funds. The only reason (and it's not even a good reason) to buy a mutual fund with a load is that you want to use an advisor or broker that is paid by commissions to give you advice. But there are plenty of outstanding no-load funds to choose from in the investment universe and the best types of investment advisors don't get paid by commissions; they only get paid by you; they only use the best no-load funds and load-waived funds. Therefore, funds that charge a load will not make my top 10 list.
  • Watch for Hidden Fees: If you pay close attention, you can easily miss (and therefore pay) unnecessary expenses. The most notorious hidden fees are 12b-1 fees, which are intended to cover fund management expenses such as marketing and service costs. The fees can be as high as 1.00%, which is enough to cost you thousands of dollars over time! No top 10 list of mutual funds worthy of publication will include funds with 12b-1 fees.
  • Avoid High Expense Ratios: Believe it or not, some loaded funds have low expenses and some no-load funds have high expenses. Regardless of fund type or presence of a load, you should eliminate funds that have above average expense ratios, which are essentially the costs of managing the fund. Here some general averages:

Large-Cap Stock Funds: 1.25%
Mid-Cap Stock Funds: 1.35%
Small-Cap Stock Funds: 1.40%
Foreign Stock Funds: 1.50%
S&P 500 Index Funds: 0.15%
Bond Funds: 0.90%

  • Ignore Short Performance History: This should be a no-brainer. Short-term performance, what I will define as less than 3 years, does not give any indication of the quality of a mutual fund. We all know that past performance is no guarantee of future results but if a fund's inception date is just one or two years ago, you won't have enough history to make a decision about buying the fund. For example, if the fund has a 2-year history and the past two years has been a bull market, there is no indication how that fund might perform in a bear market. However, the standards for my top 10 list are higher: I eliminated all funds with less than a 10-year performance history. The reasoning here is that the average full-market cycle (a period that includes both a bull market and a bear market) is 5 to 7 years. It is much more preferable to have a fund with the best 10-year performance than a fund with the best 5-year performance.
  • Don't Buy Actively-Managed Funds With Brief Manager Tenure: The reasoning on this negative quality is similar to the short performance history. If you find a fund that looks good in every way but the fund manager has only been at the helm for 6 months, you have no indication that the manager will continue in the same way as the previous manager. Therefore the best funds, especially actively-managed funds, will have a long manager tenure, ideally more than 5 years.
  • Exotic Fund Types Are Not Appropriate or Necessary for Most Investors: My list will not include any funds that are not appropriate for the general investing public. For example, the top 10 list will not include bear market funds or hedge funds.
  • Don't Settle for Poor Diversification: In this elimination criteria, I am speaking of the list (or portfolio for your purposes), not the funds themselves. My top 10 list of the best funds, like a well-built portfolio, includes a variety of diverse funds from several fund categories, not just a few fund typse.
  1. Best Large-cap Stock Index -- Vanguard 500 Index (VFINX): This fund is in the top spot because of its timeless qualities. It has low expenses and is passively managed, which makes it an outstanding choice for a core holding in almost any investment portfolio. If every fund manager is trying to beat the index, why not just own the index? This is what Vanguard founder Jack Bogle was thinking around 50 years ago when he started this legendary index fund company. Note to indexing fans: Most of the remaining top 10 best funds are actively-managed.
  2. Best Large-cap Stock, Actively-Managed -- Fidelity Growth Company (FDGRX): There are a small handful of large-cap US stock equity funds that outperform FDGRX but none of them have the consistent performance record, along with low expenses, and a long-term manager tenure. As of this writing, Steve Wymer has managed FDGRX for more than 17 years, performance ranks for 1-year, 3-year, 5-year, 10-year, and 15-year are all better (lower) than 10th percentile, and the expense ratio is only 0.83%.
  3. Best International Stock Fund -- Dodge & Cox International Stock (DODFX) has been around since 2001 and the management team has been in place for more than 10 years. During that tenure, they have consistently outperformed 90% or more of the funds in their category of large-cap foreign stock.
  4. Best Mid-cap Stock Fund -- T. Rowe Price Mid-cap Growth (RPMGX) has been managed by Brian Berghuis for 22 years, as of this writing in 2014. Performance exceeds 96% of mid-cap growth funds for 10-year returns and bests 80% for the 15-year returns. However, you may be out of luck buying shares because it is currently closed to new investors. Hopefully, it will open to new investors soon, so be sure to check, if you are looking for a good mid-cap fund.
  5. Best Small-cap Stock Fund -- Fidelity Small-cap Discovery (FSCRX) is also closed to new investors but that's evidence of a good manager. 10-year annualized returns place it ahead of 99% of small-cap funds in its category. 2014 has been a bit of set back in performance but 3-year and 5-year performance ranks place FSCRX ahead of at least 90% of category peers.
  6. Best Bond Index Fund -- Vanguard Total Bond Index (VBMFX) gets the honors here because of its rock bottom expense ratio of 0.20% and its broad and diverse exposure to the Barclay's Capital Aggregate Bond Index, which represents nearly 16,000 bonds!
  7. Best Multi-Sector Bond Fund -- Loomis Sayles Bond (LSBRX), managed for more than 20 years by bond legend, Dan Fuss, beats 91% of all other funds in the multi-sector bond category for 15-year return, which was 8.46% as of this writing in 2014. Just be cautioned that the stock-like returns come with more risk than the average bond fund because it can hold foreign bonds and junk bonds.
  8. Best Sector / Alternative Asset Class Fund -- Tocqueville Gold (TGLDX) leads the precious metals category for 15-year return, beating 99% of category peers. Other sector fund leaders include healthcare and energy stocks but there are no funds in this group with long manager tenure. Keep in mind that gold can be a good diversification tool but not recommended for beginners. The longest tenure among the management team for TGLDX is 16 years.
  9. Best Balanced Fund -- Dodge & Cox Balanced (DODBX): is managed by a team, which has an average tenure of more than 15 years with the longest tenure over 30 years. DODBX is a moderate allocation of stocks bonds and cash. This balanced fund that beats 97% of its category peers for 15-year annualized, 86% for 10-year performance and it outshines 99% of moderate-allocaiton funds for 1-year, 3-year, and 5-year returns. If you had to pick just one fund for 15 years while you lived on a deserted island, Dodge & Cox Balanced would be a fine choice.
  10. Best Target Date Retirement Funds -- Vanguard Target Retirement Funds: The best target-date retirement funds can't be limited to just one fund or target retirement date. I give this honor to Vanguard Investments because of their selection of low-cost, diversified funds. T. Rowe Price deserves an honorable mention because of their outstanding performance in this category. However, Vanguard's choices are made up of index funds and they tend to be a bit more conservative than T. Rowe's offerings.

This top 10 list was last updated in April of 2015.

Disclaimer: The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.