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Assessing Potential Annual Returns from Mutual Fund Investments

What Is the Average Mutual Fund Return? – Potential Annual Returns When You Invest in Mutual Fund

When considering investing in mutual funds, it’s important to have an idea of the potential returns you might expect. Reviewing the historical annual returns across various categories, such as large-cap stocks or long-term bonds, can provide valuable insights into potential future performance. Here’s what you need to know to make informed investment decisions.

Examining Long-Term Returns on Mutual Funds

While past performance doesn’t guarantee future results, historical returns can help set reasonable expectations for investment growth over time. For instance, in 2023, mutual funds across seven broad categories achieved an average annual return of 13.1%, significantly higher than the 15-year average. Notably, U.S. large-cap stock funds were the top performers, whereas short-term bond funds lagged behind.

Example of Long-Term Performance

Consider the Vanguard 500 Index Investor, which had a 10-year return of 12.54% as of May 31, 2024. Its average return since inception in 2004 was 11.36%. This long-term data offers a more reliable gauge for future performance than short-term results.

The 10-year annualized return of the S&P 500 Index as of June 7, 2024, stood at approximately 10.6%, while the 15-year annualized return was around 12.4%. A 15-year performance metric used to be a more realistic predictor of future performance because it included the 2008 bear market, but as of 2023, this period no longer includes that downturn.

Selecting a Benchmark

Given the diversity of mutual funds, comparing them to an appropriate benchmark is crucial. For a large-cap stock mutual fund, the S&P 500 serves as a suitable benchmark, representing 500 of the largest U.S. companies.

Another useful benchmark is the average performance of a specific mutual fund category. For instance, a large-cap stock fund with a growth objective would fall under the Large Growth category. Category returns consider expense ratios, reflecting actual investor returns, unlike indexes that do not account for expenses.

Mutual Fund Returns by Category

Mutual funds are typically categorized by their primary investments in stocks, bonds, or cash. Each asset class is further divided into multiple categories. For instance, stock funds can be segmented by market capitalization (large-cap, mid-cap, small-cap), geography, or industry sector (e.g., health care, technology).

Average Mutual Fund Returns

Here are the average returns for seven major mutual fund categories, as reported by Morningstar, Inc. The figures represent the average annual returns over various periods, culminating in a mean average across all categories.

Category2023 Return3-Year5-Year10-Year15-Year
U.S. Large-Cap Stock26.11%9.41%15.65%12.54%14.41%
U.S. Mid-Cap Stock11.04%5.21%12.28%9.77%13.42%
U.S. Small-Cap Stock18.05%1.31%10.10%8.62%12.68%
International Large-Cap Stock18.62%2.11%8.52%4.07%6.73%
Long-Term Bond7.52%-7.72%-1.93%1.57%4.35%
Intermediate-Term Bond5.60%-3.16%-0.26%1.15%2.33%
Short-Term Bond4.79%-0.59%0.86%1.22%1.69%

The funds used to calculate these averages include:

  • U.S. Large-Cap Stock: Vanguard 500 Index Investor
  • U.S. Mid-Cap Stock: Fidelity Mid-Cap Stock
  • U.S. Small-Cap Stock: Vanguard Small-Cap Index Inv
  • International Large-Cap Stock: Putnam International Equity A
  • Long-Term Bond: Vanguard Long-Term Bond Index Admiral
  • Intermediate-Term Bond: Vanguard Total Bond Market Index Inv
  • Short-Term Bond: Vanguard Short-Term Bond Index Inv

Comparing Mutual Funds to Other Investments

In 2023, mutual funds in the seven major categories averaged an annual return of 13.1%, with large-cap stock funds leading the way. This outperformed other investments such as certificates of deposit (CDs), high-yield savings accounts, and even real estate. For instance, the 10-year annualized return on real estate investments, as of June 2024, was 6.99%, according to the S&P CoreLogic Case-Shiller U.S. National Home Price NSA Index.

The Bottom Line

Long-term returns provide a more reliable expectation for future performance than short-term returns, which can be volatile. When considering mutual funds or other investments, it’s crucial to align your investment purpose and timeframe with your risk tolerance. To build wealth over time, aim to achieve returns that outpace inflation.

Frequently Asked Questions (FAQs)

What is the difference between an ETF and a mutual fund? ETFs and mutual funds differ mainly in trading and taxation. ETFs are traded on exchanges like stocks, offering greater control over taxation. Despite these differences, ETFs and mutual funds tracking similar indexes usually have comparable returns.

What is a money market mutual fund? A money market mutual fund is a type of mutual fund that invests in short-term, cash-like securities such as Treasury securities and CDs. These funds are considered low-risk but typically offer lower returns.

Note: Investing involves risk, including the potential loss of principal. Past performance is not indicative of future results.

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