Here’s a breakdown and what you need to know as you assess your options.
Look at Long-Term Returns on Mutual Funds
Although past performance is no guarantee of future results, historical returns can provide reasonable expectations about the growth of an investment over time. For example, in 2021, mutual funds in seven broad categories averaged an annual return of 11.54% (see the table below), well above the average annual return over the 15 years prior to that. U.S. large-cap stock funds were the best performing category of 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 Dec. 31, 2021, while its average return since its inception in 2004 as of that same date was 11.66%. One of the more reliable gauges of future performance is the average annual return over a past 15-year period. Short-term performance can vary widely, so even looking at a past 10-year period may not capture the full picture for you. For example, the 10-year annualized return of the S&P 500 Index as of Jan. 18, 2022, was about 13.34%. But the 15-year annualized return as of that same date was 8.08%.
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 as a benchmark because it reflects 500 of the largest U.S. companies. Another benchmark is the average performance for a particular category of mutual funds. 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 Mutual Fund 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, small-cap), by country or region, or by business sector, such as health care or technology.
Average Mutual Fund Returns
Below 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 three-, five-, 10-, and 15-year figures represent the average annual return over given time periods. The last row is the mean average of the seven major categories. The funds used to find the category averages in our table were:
U.S. Large-Cap Stock: Vanguard 500 Index InvestorU.S. Mid-Cap Stock: Fidelity Mid-Cap StockU.S. Small-Cap Stock: Vanguard Small-Cap Index InvInternational Large-Cap Stock: Putnam International Equity ALong-Term Bond: Vanguard Long-Term Bond Index AdmiralIntermediate-Term Bond: Vanguard Total Bond Market Index InvShort-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 for 2021 was 11.54%. Large-cap stock funds performed the best, outpacing many of the returns investors may have gotten on 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 CD was under 2% from August 2010 through the end of 2021. Even the 10-year annualized return as of October 2021 on real estate investments was 7.06%, as measured by the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index. Mutual funds have also outpaced inflation and outperformed 10-year U.S. Treasury bonds and gold in the past. However, there’s always the chance of economic uncertainty with any investment that could prove this past performance to be untrue.
The Bottom Line
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. The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk, including the possible loss of principal.
