If you’re looking into investing in mutual funds, you’ll want a sense of the average return before making any moves. In 2020, mutual funds in seven broad categories have averaged a return of roughly 10%, almost double the average annual return over the past 15 years. U.S. large-cap stock funds have been the best performing category of the seven we looked at, and short-term bond funds the worst. Here’s a breakdown and what you need to know as you assess your options.
Look at Long-Term Returns
Although past performance is no guarantee of future results, historical returns can provide reasonable expectations about the growth of an investment over time.
One of the more reliable gauges of future performance is the average annual return over the past 15 years. Short-term performance varies widely, and even looking at the past 10 years may not capture the full picture.
Using the S&P 500 Index as a benchmark, stocks have had an average annual return of more than 11% over the past 10 years and more than 7% over the past 15 years. The 15-year figure is a more realistic predictor of future performance because it includes the bear market of 2008.
Choose a Benchmark
Since there are many different types of mutual funds, it’s best to make apples-to-apples comparisons with a suitable benchmark. For example, to measure a large-cap stock mutual fund, you can use the S&P 500, which reflects 500 of the largest U.S. companies.
Another benchmark is the average performance for a particular category of mutual funds. So, a large-cap stock fund with a growth objective would be categorized as a Large Growth fund. Category returns are more reflective of actual results because the returns factor in the expense ratios—how much an investor pays for the operation of the fund. Indexes, on the other hand, do not reflect expenses.
Consider Returns by Category
Since there are so many different types of mutual funds, and there’s no way to track the entire universe, it’s best to look at categories.
Mutual funds invest primarily in stocks, bonds, or cash (or some combination). Within each asset class, there are multiple categories. For instance, stock funds can be organized by market capitalization (large-cap, mid-cap, etc.), by country or region, or by business sector, such as healthcare or technology.
Here are the average mutual fund returns for seven major categories used by Morningstar, Inc. The figures represent the average for all mutual funds, including index funds, within the respective category. The 3-,5-,10-, and 15-year figures represent the average annual return over given time periods. The last row is the mean of the seven major categories.
|Average Mutual Fund Returns in 2020 and the Long Term|
|Fund Category||YTD 2020||3-Year||5-Year||10-Year||15-Year|
|U.S. Large-Cap Stock||13.76||11.77||12.98||12.02||8.66|
|U.S. Mid-Cap Stock||11.50||7.85||10.90||10.04||7.88|
|U.S. Small-Cap Stock||10.25||6.00||10.32||9.65||7.84|
|International Large-Cap Stock||6.46||3.42||7.21||5.10||4.44|
Note: Category averages were determined by looking up a particular fund and adding or subtracting the '+/- Category' figure shown under the respective 'Total Return %.' The funds used to find category averages were:
- U.S. Large-Cap Stock: Vanguard 500 Index Investor
- U.S. Mid-Cap Stock: Fidelity Mid-Cap Stock
- U.S. Small-Cap Stock: Vanguard Small-Cap Index INV
- International Large-Cap Stock: Putnam International Equity A
- Long-Term Bond: Vanguard Long-Term Bond Index Investor
- Intermediate-Term Bond: Vanguard Total Bond Market Index INV
- Short-Term Bond: Vanguard Short-Term Bond Index INV
How Mutual Funds Compare to Other Investments
Looking at the seven major categories of mutual funds above, the average annualized return is about 9.5%, well below the average for 2020. But even using the longer-term perspective, mutual funds outpace inflation and outperform other types of investments, including certificates of deposit (CDs), 10-year U.S. Treasury bonds, and gold.
The average interest rate for a 5-year CD has been under 2% for most of the last 10 years. Ten-year Treasuries have had an annualized return of 2.70% over that period, and gold has averaged 3.14%. Even the 10-year annualized return on real estate investments is 4.85%, as measured by the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index.
Long-term annualized returns provide a more reasonable expectation about future performance than short-term returns, which are more volatile and unpredictable. If you’re looking at mutual funds or other investments, determine the purpose and time frame of your investment, then assess your risk tolerance. To build wealth over time, look to outpace inflation.