Moneyzine
/Investment Guides /Understanding Mutual Fund Performance

Understanding Mutual Fund Performance

Moneyzine Editor
Author: 
Moneyzine Editor
6 mins
November 6th, 2024
Advertiser Disclosure

In this article, we're going to provide an overview of the variables that can impact the performance of a mutual fund. Then we're going to finish up with return on investment information for the top performing mutual fund categories, which allows for a benchmark comparison between fund types.

Benefits of Mutual Funds

Mutual funds are a great introduction to the stock or bond market. When buying into a mutual fund, an investor is really purchasing a share in a portfolio of securities. These can be stocks, bonds, or a combination of the two. Purchasing a diverse portfolio of stocks allows the investor to reduce the investment's overall risk profile.

Minimizing Risk

When investing money in a company, as is the case when buying common stocks, the investment carries with it two risks. The first risk comes from the company itself. For example, the company might go out of business, or underperform relative to its peers. When that happens, the price of the stock will fall. Let's take a look at two companies that are essentially in the same business: Kmart and Wal-Mart.

Each of these companies has their own strategy, but they are both vying for the same consumer dollar. Arguably, Wal-Mart is winning this contest, and Kmart's stock price is suffering (now owned by Sears). This is one form of the company risk that investors inherited when they purchased shares of Kmart common stock.

Mutual funds can help minimize individual stock risk because they represent a mix or portfolio of stocks.

The second form of risk assumed by investors in both Kmart and Wal-Mart stock is a more general market risk. This is the risk that the entire stock market itself might go up (which is called a bull market) or fall (which is called a bear market). Generally, this market risk is linked to macroeconomic factors such as interest rates and other variables that affect all companies equally.

Market risk might also be linked to world events, which can translate into pessimistic sentiments among investors. For example, rising oil prices might make investors more pessimistic about the near term future. Mutual funds cannot help the investor mitigate this type of risk.

Measuring Fund Performance

Just like common stocks, the performance of mutual funds is affected by these macroeconomic factors as well as investor sentiment. Since mutual funds are portfolios of stocks, they can minimize individual stock risk. This makes mutual funds very attractive to investors that do not have enough money to create their own portfolio of stocks.

Fees and Loads

The problem with mutual funds is the investor is paying someone else to manage the portfolio, and the fees charged can eat into the performance of the mutual fund itself. One source of fees is the actively trading of stocks in the portfolio, and payment of the associated brokerage fees. The second major source of costs is management fees. The prospectus for the fund will outline how much the fees run for each mutual fund. But that number can be deceiving too.

When analyzing a mutual fund, it's important to understand all of the fees charged, which fall into three categories:

  • Front-Loads: payments due when shares of the mutual fund are purchased, and usually stated in terms of a percentage of the investment.

  • Back-Loads: payments due when shares of the mutual fund are sold, or redeemed. These fees are usually stated in terms of a percentage of the investment.

  • Expense Ratios: management fees paid to the fund's managers, which includes payment of their salaries and transaction costs associated with the trading of securities held in the fund.

(We have an entire article dedicated to mutual fund loads if anyone is interested in learning more about these fees.)

Example: How Fees Impact Performance

Let's say the mutual fund indicates the fees are only 2.0%. That does not sound like a lot of money, until you do the math and figure out the impact on an investment. Let's assume Ann invested $10,000 in a mutual fund 10 years ago, and the market moved an average of 10.0% each year over that 10 year timeframe. If her mutual fund was able to match the performance of the market, and not all of them can do this, then her average return was 8.0%, which is a 20% reduction in return on investment.

If Ann could have avoided paying fees, then she would have about $25,937 at the end of year 10. But her fund performance was hurt by fees and that same investment at 8.0% is only worth $21,589 at the end of year 10, which means she paid $4,348 in fees over that timeframe.

Analyzing Mutual Fund Performance

Anyone that is planning to buy a mutual fund for the first time will need to open an account with a broker. All full-service brokerage houses, such as Schwab, provide their clients with many tools to analyze the performance of mutual funds. These tools include:

  • Fund Screeners: allows investors to analyze mutual funds by category, fees / loads, ratings, expenses, and performance (usually stated in terms of average annual return).

  • Information Views: includes fees, pre-tax performance, average annual returns, risk analysis, and the size of the fund.

  • Fund Comparisons: side by side comparisons of mutual funds with respect to data similar to the information views mentioned above.

The topic of analyzing mutual fund performance is discussed at length in our article: Evaluating Mutual Funds.

Long and Short Term Performance

As promised, we're going to finish this article by providing benchmarks for long and short-term performance of mutual funds, by fund category.

In this first table, we're providing a long-term performance view by listing the top ten performing mutual fund categories over the last five years. Ranking in the table below is based on the average annual return over the last five years. (September 2019)

Top Long-Term Mutual Fund Performers 2019

Fund Category5-Year Return
Technology17.81%
Health14.17%
Large Growth13.82%
Large Blend11.81%
Industrials11.65%
India Equity11.59%
Mid-Cap Growth11.24%
Small Growth11.17%
Financial10.37%
Large Value10.10%

This second table provides a view of the short term mutual fund performance, by category. Once again, ranking is based on the average return over the last twelve months (September 2019):

Top Short-Term Mutual Fund Performers 2019

Fund Category1-Year Return
Technology23.96%
Large Growth23.37%
Small Growth22.85%
Mid-Cap Growth19.61%
Health19.17%
Consumer Cyclical18.36%
Large Blend15.64%
Equity Energy14.61%
Industrials11.76%
Large Value11.20%

About the Author - Mutual Fund Performance


Explore Investing Further

  • Trading has never been easier, thanks to the rise of online platforms that enable you to buy and sell various assets at the click of a button. But with so many options available, it can be challenging to decide which platform is right for you.
  • Looking for a way to avoid swap fees while trading forex?
  • By providing instant diversification for your portfolio, investing in ETFs can amplify the potential of any investor, novice or seasoned alike. We scoped the market to curate a list of the best ETF trading platforms available for US investors.
  • Our top beginner's pick for copy trading is eToro. Read on for more details, plus seven good alternatives.
  • Swing trading stocks can be a great way for investors to take advantage of short-term stock market movements and gain significant returns. If you're interested in swing trading, the key to success lies in selecting the right stocks to buy and sell quickly for a profit.
  • The table below lists the best stock picks under $2, listed on public exchanges.
  • The table below lists the best stock picks under $1, listed both on public and OTC exchanges.
  • This section will highlight the best EV-trading penny stocks available in the United States.
  • The demand for sustainable energy has grown rapidly in recent years. This has resulted in increased scrutiny of the automotive market. As a result, the electric vehicle (EV) industry has made significant advancements.
  • Intelligent Bio Solutions Inc. is a life sciences company, founded in 2016 with headquarters in New York and is engaged in performing diagnostic tests, real-time monitoring, and non-invasive surgery for its patients. The firm has developed a CoV-2 Biosensor, which can be used in RNA virus detection.
  • Hour Loop was founded in 2013 with headquarters in Redmond, Washington. It’s an online retailer involved in e-commerce in the United States that hit the public markets on Jan 7th of 2022. The company sells home/garden decor, electronic products, kitchenware, and apparel through walmart.com, amazon.com, and hourloop.com.

Related Content

  • What Can Help You Meet Your Budget While Shopping for Important Items?
    Budgeting while ensuring you don't compromise on quality can seem daunting. Whether filling your pantry, updating your wardrobe, or keeping up with the latest tech, smart shopping strategies are crucial for keeping your finances in check.
    April 2nd, 2024
  • How to Make a Million Dollars in 10 Years
    Truthfully, this title should actually be “How to Make a Million Dollars in 10 Years Without Going Into Debt", but that is just getting a little too winded for my liking. It’s true though!
    November 5th, 2024
  • How to Apply Maslow’s Hierarchy to Your Money This Year
    You might vaguely remember your psychology teacher talking about Maslow. He pointed at a picture of a triangle as you nodded off in the back of the school room.
    November 5th, 2024
  • How to Tackle Multiple Savings Goals
    When there’s only so much money to go around, there are often multiple savings goals competing for your money. Think of the young professional who’d like to get a more reliable car, buy a house, and save for retirement. Or consider the young family that’s saving for college, retirement, and a bigger house.
    March 22nd, 2024
  • The Countdown to Early Retirement: 10 Expenses to Eliminate
    Dreaming of waving goodbye to the daily grind five years ahead of schedule? The road to early retirement is paved with more than good intentions; it requires a meticulously crafted strategy with surprising twists. It's not solely about what you should be doing—like diligently saving a portion of your income or investing wisely—but also about what you need to stop doing.
    March 22nd, 2024

Contributors

Moneyzine Editor
The Moneyzine editorial team consists of writers and content specialists with diverse backgrounds.
Moneyzine 2024. All Rights Reserved.