If you are looking to invest in mutual funds, you may want to get an idea of the average return before taking any steps with your money. Looking at recent annual returns on mutual funds in broad categories such as large-cap stocks or long-term bonds can help you better understand where your money might be appropriately invested.
Consider Long-Term Returns on Mutual Funds
While past performance is not a guarantee of future results, historical returns can provide reasonable expectations for investment growth over time.
For example, in 2021, the annual returns for mutual funds in seven broad categories averaged 11.54%, exceeding the annual average over the previous 15 years. U.S. large-cap stock funds were the best-performing category among the seven, while short-term bond funds were the worst.
You can also look at performance since inception. For example, the Vanguard 500 Index Investor had a 10-year return of 15.46% as of December 31, 2021, while the average return since its inception in 2004 until the same date was 11.66%.
One of the more reliable indicators of future performance is the average annual return over the past 15 years. Short-term performance can vary significantly, so even looking at a prior 10-year period may not capture the full picture for you.
For example, the 10-year annual return of the S&P 500 index as of January 18, 2022, was approximately 13.34%. However, the 15-year annual return until the same date was about 8.08%.
Note: As of the end of 2022, the 15-year figure is considered a more realistic indicator of future performance as it includes the bear market of 2008. Once it is 2023, the bear market of 2008 will not be part of the 15-year figure.
Selecting a Benchmark
Since there are many types of mutual funds, it is best to make appropriate comparisons using a suitable benchmark. For instance, to measure a large-cap equity fund, you can use the S&P 500 index because it reflects 500 of the largest companies in the U.S.
Another benchmark is the average performance of a specific category of mutual funds. A large-cap equity fund aimed at growth can be classified as a large growth fund. The category returns reflect actual results better because returns consider cost ratios – the amount an investor pays to run the fund. On the other hand, indices do not reflect costs.
Considering Mutual Fund Returns by Category
Given the many types of mutual funds and the lack of a way to track the entire universe, it is best to look at categories.
Mutual funds primarily invest in stocks, bonds, or cash (or some balance thereof). Within each of these categories, there are several sub-categories. For instance, stock funds can be organized by market size (large-cap, mid-cap, and small-cap), by country or region, or by business sector, such as healthcare or technology.
Average Returns of Mutual Funds
Below are the average returns of mutual funds for seven main categories used by Morningstar, Inc. The numbers represent the average of all mutual funds, including index funds, in the particular category. The numbers for the three-, five-, ten-, and fifteen-year periods represent the annual average over the specified time periods. The last row is the arithmetic average of the seven main categories.
| Category | Return | 3 Years | 5 Years | 10 Years | 15 Years |
|---|---|---|---|---|---|
| Large-cap stocks in the United States | 26.07% | 23.83% | 16.57% | 14.96% | 9.73% |
| Mid-cap stocks in the United States | 23.40% | 20.74% | 12.67% | 13.12% | 8.73% |
| Small-cap stocks in the United States | 24.19% | 19.73% | 11.22% | 12.74% | 8.50% |
| International large-cap stocks | 9.72% | 13.56% | 9.38% | 7.85% | 3.75% |
| Long-term bonds | -1.19% | 10.37% | 7.22% | 6.02% | 6.75% |
| Medium-term bonds | -1.48% | 4.81% | 3.47% | 2.95% | 3.98% |
| Short-term bonds | 0.05% | 3.02% | 2.37% | 1.96% | 2.59% |
| Average | 11.54% | 13.72% | 8.99% | 8.51% | 6.29% |
The returns for each category were determined by looking up a specific fund (see below) and examining the lagged performance table at the end of the month, where the total return (%) for the category is listed across each time period. The average return is the mean of the seven returns listed above.
The funds used to determine the average category in our table are:
- Large-cap stocks in the United States: Vanguard 500 Index Investor
- Mid-cap stocks in the United States: Fidelity Mid-Cap Stock
- Small-cap stocks in the United States: Vanguard Small-Cap Index Inv
- International large-cap stocks: Putnam International Equity A
- Long-term bonds: Vanguard Long-Term Bond Index Admiral
- Medium-term bonds: Vanguard Total Bond Market Index Inv
- Short-term bonds: Vanguard Short-Term Bond Index Inv
How do mutual funds compare to other investments?
Given the view of the seven major categories of mutual funds above, the average annual return for 2021 was 11.54%. Large-cap stock funds performed the best, surpassing many returns investors could earn in other accounts, such as certificates of deposit (CDs), high-yield savings accounts, and even real estate.
For example, the average interest rate for a five-year certificate of deposit was less than 2% from August 2010 through the end of 2021. Even the 10-year annual return through October 2021 for real estate investments was 7.06%, according to the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index.
Mutual funds also outperformed inflation and surpassed 10-year U.S. Treasury Bonds and gold in the past. However, there is always a chance of economic uncertainty with any investment that could prove this past performance incorrect.
Conclusion
The average annual returns over the long term provide a more reasonable expectation of future performance than the short-term returns which are more volatile and unpredictable. If you are considering mutual funds or other investments, determine the purpose and time frame for your investment and then assess your risk level. To build wealth over the long term, aim to outperform inflation.
Frequently Asked Questions (FAQs)
What is the difference between an Exchange-Traded Fund (ETF) and a mutual fund?
The differences between Exchange-Traded Funds (ETFs) and mutual funds relate to how they are traded and the taxes imposed on them. ETFs can be bought and sold throughout the trading day, and they also give you more control over taxes. When it comes to average returns, ETFs and mutual funds that track similar indices should have similar returns. They are both collective investment products where investors pool money together to invest in a common goal.
What is a money market mutual fund?
A money market mutual fund is essentially the same as any other type of mutual fund, but it is considered one of the safest investment products available. Money market funds typically invest in short-term securities such as government securities, municipal bonds, and certificates of deposit (CDs). The trade-off with these low-risk investments is that they usually earn a very minimal return.
The Balance does not provide tax, investment, or financial services and does not provide advice. Information is presented without consideration of the investment goals, risk tolerance, and financial circumstances of any specific investor and may not be suitable for all investors.
Source: https://www.thebalancemoney.com/what-is-the-average-mutual-fund-return-4773782
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