One of the best mutual funds

Mutual funds can be an option if you are looking for actively managed funds that are low risk and fairly diversified.

However, there is one clear winner when compared to index funds.

With mutual funds, you have to pay a higher fee. This is because the fund is actively managed by fund managers. With index funds, however, the fees are much lower as these funds track an index like the S&P 500.

Index funds also regularly outperform actively managed funds. After all, fund managers are just people who need to use their judgment to see what could go well. This means that they are often prone to errors.

For this reason, we recommend that you choose a reliable and historically well-functioning index fund (more on this later). However, if you’re looking to consider mutual funds, this is a good place to start.

The best table of contents for mutual funds:

The 5 best mutual funds

Note that this is not a list of the best mutual funds that are performing at the moment you read this. Rather, it is a list of investment funds that we believe meet two criteria:

  • Overall performance. This is a long-term performance over a period of decades.
  • Good banks. The funds come from banking institutions that we trust and that we can rely on.

Also note that all of the following information was written as of early 2020. With that in mind, here are our five favorite actively managed mutual funds.

Vanguard Wellington Fund (VWELX) investor shares

  • Minimum investment: $ 3,000
  • Expense ratio: 0.25%
  • 1 year return: 7.55%
  • 3 Year Return: 8.13%
  • 5 year return: 9.90%
  • 10 year return: 9.61%
  • Lifetime return: 8.29%
  • Yield: 1.59%

Founded in 1929, the Vanguard Wellington Fund is the bank’s oldest mutual fund and the country’s oldest balanced fund. It’s a fund that has seen the country’s biggest economic downturn, from the Great Depression to the Great Depression – and for good reason.

In terms of asset allocation, the fund is moderately balanced, including plenty of dividend-paying stocks and high quality bonds. Overall, it is a very balanced investment fund that is designed to reduce risk.

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Vanguard Health Care Fund (VGHCX) investor stocks

  • Minimum investment: $ 3,000
  • Expense ratio: 0.32%
  • 1 Year Return: 25.79%
  • 3 year return: 10.41%
  • 5 year return: 9.63%
  • 10 Year Return: 14.98%
  • Lifetime return: 16.06%
  • Yield: 0.85%

This is a fantastic mutual fund with national and international investments in the healthcare sector. This includes things like medical utilities, hospitals, and also pharmaceutical companies.

Since its inception in 1984, the company has grown at an average annual rate of 16.06% and is still doing well today. And with a low expense ratio of 0.32%, you don’t have to worry about management fees cutting costs.

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Fidelity Magellan (FMAGX)

  • Minimum investment: 0 USD
  • Expense ratio: 0.77%
  • 1 Year Return: 27.67%
  • 3 year return: 16.35%
  • 5 year return: 16.27%
  • 10 Year Return: 13.93%
  • Lifetime Return: 16%
  • Yield: 0.24%

This is a very popular mutual fund that invests in high-growth companies – and for good reason. In the 1980s, famous investor Peter Lynch managed the fund with an average annual return of 29.2%.

Since its inception in 1963, this fund has had some solid annual returns – often beating the S&P 500 as an investment (not that it matters too much).

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T. Rowe Prize New Horizons Fund (PRNHX)

  • Minimum investment: $ 2,500
  • Expense ratio: 0.76%
  • 1 Year Return: 47.98%
  • 3 year return: 26.74%
  • 5 year return: 23.73%
  • 10 Year Return: 20.88%
  • Lifetime return: 12.30%
  • Yield: 0%

The T. Rowe Price New Horizons Fund is a good fund that focuses on small and mid-cap growth and invests in small but fast growing companies. This includes companies that develop new and innovative technologies, as well as other products that are expected to be popular.

An interesting feature of New Horizons is that it also includes investing in private companies – these are companies that don’t (yet) offer shares to the public. These companies include the Evernote note-taking app.

This fund is currently closed to new investors, but may reopen in the future.

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Fidelity Select Software and IT Service Fund (FSCSX)

  • Minimum investment: 0 USD
  • Expense ratio: 0.71%
  • 1 Year Return: 41.70%
  • 3 year return: 26.84%
  • 5 Year Return: 26.32%
  • 10 Year Return: 21.56%
  • Lifetime return: 16.70%
  • Yield: 0.74%

This fund invests in some of the largest technology and software companies, including Microsoft, Visa, Adobe and Google. Typically around 80% of assets are in technology companies.

And if you’re wondering how this fund has done over the years, fear not. It survived the tech bubble burst of the early 2000s as well as the stock market crash of 1987. Overall, it’s a great, high-yielding fund that has been proven to weather the worst financial storms.

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How mutual funds work

Think of a mutual fund as a basket. There are many different types of investments in this basket (e.g. stocks and bonds).

You and other investors pool your money to invest in this basket – also known as a portfolio.

This allows you to invest in portfolios that you would otherwise not be able to afford. That’s because you are investing with other people too.

They’re great because investors can choose a single portfolio that contains many different types of stocks, bonds, and other securities. This is also known as diversification and it lowers your overall risk when investing.

And there are also many different types of mutual funds:

  • Equity funds. These are funds that invest primarily in stocks. Typically, the funds fall into smaller categories named for the size of the organizations in which they invest. For example, there are small, mid and large cap funds.
  • Pension funds. These are funds that invest primarily in bonds. As such, they are usually viewed as safer, lower risk investments.
  • Balanced means. These are funds that invest in both stocks and bonds. Your goal is to maintain a specific asset allocation between stocks and bonds. For example, there are cut-off date funds that will automatically adjust your asset allocation as you approach retirement age.
  • Index funds. These funds track indices such as the S&P 500 and the Dow Jones Industrial Average. These are incredibly popular funds because of their consistency and low expense ratio. After all, they don’t need a fund manager as they just track and index.

REMEMBER: People often speak of actively managed funds when they talk about mutual funds – although index funds are technically mutual funds too.

Mutual funds usually pay out two options for investors:

  1. Distributions. This is the case when a mutual fund has an asset that pays dividends like stocks.
  2. Capital gain. At this point, you are selling your mutual fund for more than you bought it.

If you have an actively managed fund, I wouldn’t bet it will beat the market. In fact, 66% of active large cap managers couldn’t beat the S&P 500.

Does that mean you should avoid getting mutual funds though? Not necessarily.

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How to choose the best mutual funds

The best mutual funds are index funds.

Why? Easy:

  • Inexpensive. The expense ratio for index funds is incredibly low. For example, Vanguard’s 500 Index Fund has an expense ratio of just 0.04%.
  • Not an active manager. Since they only track an index, they are not prone to the mistakes a human money manager makes.
  • Historically successful. Even when the S&P 500 is having a bad year, the market keeps bouncing back. Do not you believe me? There has been evidence of this for more than 100 years.

Which index funds should you get? Here are some of the most popular:

Index or Mutual Fund?

Mutual funds are a relatively low risk way to invest in your future. They’re great if you like a straightforward, varied investment style.

However, investors should be wary of actively managed funds. After all, they are managed by humans and humans are prone to error.

For this reason we recommend that you invest in an index fund that tracks an index for you. This makes investing easier. It also has a historic track record – even in the worst economic disasters of our time.

For more information on mutual funds, please see our article on mutual funds here.

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