Mutual funds can be an option if youre looking for actively managed funds that are low risk and fairly diversified.
When compared to index funds, though, theres a clear winner.
With mutual funds, you have to pay a higher expense fee. Thats because the fund is actively managed by fund managers. But with index funds, the fees are much lower because those funds track an index like the S&P 500.
Also index funds regularly outperform actively managed funds. After all, fund managers are just humans who have to use their judgement to see what might perform well. That means theyre often susceptible to error.
That's why I recommend you pick some reliable and historically well-performing index fund (more on this later). But if you want to consider mutual funds, heres a good place to start.
Keep in mind that this isnt a list of the best mutual funds performing at the very moment that youre reading this. Rather its a list of the mutual funds that fit two criteria for us:
Started in 1929, the Vanguard Wellington Fund is the banks oldest mutual fund and the nations oldest balanced fund. Its a fund that has seen the countrys biggest economic downturns from the Great Depression to the Great Recessionand for good reason.
In terms of asset allocation, the fund is moderately balanced including plenty of dividend-paying stocks as well as high-quality bonds. Overall, its a very well-balanced mutual fund designed to lower risk.
This is a fantastic mutual fund with domestic and international investments in the healthcare sector. This includes things like medical supply companies, hospitals, and also pharma companies.
It has returned an average 16.06% in annual gains since its inception in 1984 and continues to perform well today. And with a low expense ratio of .32%, you dont have to worry about being nickel-and-dimed by management fees.
This is a very popular mutual fund with investments in large-growth companiesand for good reason. Throughout the 1980s, famed investor Peter Lynch managed the fund to great success, averaging an annual return of 29.2%.
Since its inception in 1963, this fund has had some solid annual returnsoften beating the S&P 500 as an investment (not that it matters too much).
The T. Rowe Price New Horizons Fund is a good fund that focuses on small- and mid-cap growth, investing in small but quickly growing companies. This includes companies that are developing new and innovative technologies as well as other products that are expected to be popular.
One interesting thing to note about New Horizons is that it also includes investments in private companiesthose are companies that dont offer shares to the public (yet). These companies include the note-taking app Evernote.
This fund is currently closed to new investors, but it may reopen in the future.
This fund invests in some of the biggest tech and software companies out there including Microsoft, Visa, Adobe, and Google. Typically, about 80% of the assets are in tech companies.
And if youre wondering how this fund has fared throughout the years, have no fear. Its survived the Tech Bubble Burst of the early 2000s as well as the 1987 stock market crash. Overall, its a great fund with high returns that has a proven track record of weathering the worst financial storms.
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Think of a mutual fund as a basket. In this basket are many different types of investments (e.g. stocks and bonds).
You and other investors pool your money together to invest in this basketotherwise known as a portfolio.
That allows you to invest in portfolios you wouldnt otherwise be able to afford alone. Thats because youre investing with other people as well.
Theyre great because investors can pick a single portfolio that contains many different types of stocks, bonds, and other securities. Thats also known as diversification and lowers your overall risk when investing.
And there are many different types of mutual funds too:
REMEMBER: People often refer to actively-managed funds when they talk about mutual fundseven though index funds are technically mutual funds as well.
Mutual funds typically pay out two ways for investors:
If you have an actively-managed fund, I wouldnt bet on it beating the market though. In fact, 66% of large-cap active managers failed to beat the S&P 500.
Does that mean you should avoid getting mutual funds though? Not necessarily.
The best mutual funds are index funds.
Why? Simple:
Which index funds should you get? Here are a few of the most popular ones out there:
Mutual funds are a relatively low-risk way to start investing for your future. Theyre great if you like a hands-off, diversified style of investing.
But investors should be wary of any actively-managed funds. After all, theyre managed by humans and humans are prone to mistakes.
Thats why I suggest you invest in an index fund that tracks an index for you. This takes the guesswork out of investing. It also has a historical track record of successeven in the worst economic disasters of our time.
For more on mutual funds, be sure to check out our article all about mutual funds here.