Barbara FriedbergInvesting Expert Writer
Friedberg is a former investment portfolio manager, university finance instructor and author of three books including "Personal Finance; An Encyclopedia of Modern Money Management." Her work has been featured in national investment publications such as Forbes Advisor, Investopedia, U.S.News and World Report, Yahoo Finance, GoBankingRates and InvestorPlace. She is a regular panelist on the Money Tree Investing Podcast and owns BarbaraFriedbergPersonalFinance.com.
Barbara Friedberg
Barbara FriedbergInvesting Expert Writer
Friedberg is a former investment portfolio manager, university finance instructor and author of three books including "Personal Finance; An Encyclopedia of Modern Money Management." Her work has been featured in national investment publications such as Forbes Advisor, Investopedia, U.S.News and World Report, Yahoo Finance, GoBankingRates and InvestorPlace. She is a regular panelist on the Money Tree Investing Podcast and owns BarbaraFriedbergPersonalFinance.com.
Investing Expert Writer
Paul KatzeffDeputy Editor, Investing
Paul Katzeff is an award-winning journalist who has written four books about how to grow your 401(k) retirement nest egg and one about internet investing. Before becoming an investing deputy editor with Forbes Advisor, he was a senior reporter/writer at Investor's Business Daily, a correspondent for Money magazine, managing editor of the Boston Business Journal and staff writer for the Boston Herald American Sunday magazine. His work has been featured in The New York Times and The Wall Street Journal.
Fact Checked
Paul Katzeff
Paul KatzeffDeputy Editor, Investing
Paul Katzeff is an award-winning journalist who has written four books about how to grow your 401(k) retirement nest egg and one about internet investing. Before becoming an investing deputy editor with Forbes Advisor, he was a senior reporter/writer at Investor's Business Daily, a correspondent for Money magazine, managing editor of the Boston Business Journal and staff writer for the Boston Herald American Sunday magazine. His work has been featured in The New York Times and The Wall Street Journal.
Deputy Editor, Investing
Fact Checked
Updated: May 13, 2024, 2:16pm
Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors' opinions or evaluations.
A first-rate mutual fund portfolio is diversified. It holds funds focusing on U.S. stocks and bonds as well as international securities. It offers both growth and value stocks as well as passively managed funds and active funds. Most importantly, however, it tilts toward low-fee funds.
For investors interested in building that kind of portfolio themselves, Forbes Advisor has developed this list of the 10 mutual funds we deem to be the very best.
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Summary: Best Mutual Funds
| Fund (ticker) | 10-Year Avg. Ann. Return |
|---|---|
Fidelity International Index Fund (FSPSX) | 4.45% |
Fidelity U.S. Sustainability Index Fund (FITLX) | n/a |
Schwab S&P 500 Index Fund (SWPPX) | 12.35% |
Shelton Nasdaq-100 Index Investor Fund (NASDX) | 17.63% |
Schwab Fundamental US Large Company Index Fund (SFLNX) | 10.98% |
Fidelity Intermediate Municipal Income Fund (FLTMX) | 2.10% |
Dodge & Cox Income (DODIX) | 2.17% |
Vanguard Long-Term Investment-Grade Investor Shares (VWESX) | 2.21% |
Schwab Fundamental US Small Company Index Fund (SFSNX) | 8.15% |
T. Rowe Price Mid-Cap Growth Fund (RPMGX) | 10.72% |
Fidelity International Index Fund (FSPSX)
Expense ratio
0.035%
Dividend yield
3.10%
10-year avg. ann. return
4.45%
0.035%
3.10%
4.45%
Editor's Take
Fidelity has been a mutual fund provider for decades, and to the benefit of fund shareholders industrywide it has been a champion of low fees. Fidelity International Index Fund’s low expense ratio makes it tough for rivals to outperform this market-cap-weighted index fund.
FSPSX owns mid- and large-cap companies from 21 international markets. Its index tracks developed markets outside the U.S. and Canada. Some of those nations, like China, are large but categorized as emerging markets by some other index authorities.
FSPSX’s average annual returns topped its Morningstar peer group’s average during the past one, three, five and 10 years.
The diversified fund owns roughly 800 growth, value and core stocks. The 10 largest names only encompass about 15% of the portfolio. Earnings in the next three to five years are expected to outpace its Morningstar category’s average. FSPSX’s dividend yield rewards investors with cash flow and also tops its category average.
Fidelity U.S. Sustainability Index Fund (FITLX)
Expense ratio
0.11%
Dividend yield
1.05%
Avg. ann. return since inception (May 2017)
13.80%
0.11%
1.05%
13.80%
Editor's Take
Fidelity’s U.S. Sustainability Index Fund, available through Fidelity with no transaction fee, gives investors a low-cost way to invest in the members of the MSCI USA ESG Select Index. The companies are screened for environmental, social and governance, or ESG, factors.
Investors worried about losing performance when investing in ESG will be pleased that FITLX’s average annual returns surpassed its Morningstar large-cap blend category average in the past one, three and five years.
While categorized as a blend portfolio—meaning that it holds growth, value and middle-of-the-road stocks—FITLX favors growth equities.
FITLX holds roughly 290 stocks and other securities. Its weighting in Microsoft (MSFT) alone is about 12%. The top 10 holdings make up nearly 40% of the portfolio. Other well-known top holdings include Nvidia (NVDA), Alphabet (GOOGL) and Tesla (TSLA).
Schwab S&P 500 Index Fund (SWPPX)
Expense ratio
0.02%
Dividend yield
1.35%
10-year avg. ann. return
12.35%
0.02%
1.35%
12.35%
Editor's Take
Schwab S&P 500 Index gives shareholders exposure to most of the 500 largest U.S. companies for a rock-bottom fee. Investors get wide diversification, with performance that hugs the broad market.
SWPPX’s 10-year average annual return above 12% beats its Morningstar category’s average. The fund’s zero minimum initial investment requirement opens SWPPX to the smallest investors.
Similar to most market-capitalization weighted index funds, SWPPX’s largest companies garner the greatest percent of the assets. The fund’s top 10 holdings make up about 30% of the portfolio’s total net assets. Investors in the Schwab S&P 500 Index enjoy exposure to stock market darlings such as Microsoft, Apple (AAPL), Amazon (AMZN), Nvidia, Facebook parent Meta Platforms (META) and Berkshire Hathaway (BRK.B).
Shelton Nasdaq-100 Index Fund Investor (NASDX)
Expense ratio
0.52%
Dividend yield
0.41%
10-year avg. ann. return
17.63%
0.52%
0.41%
17.63%
Editor's Take
If you did not own a Nasdaq-100 mutual fund over the past decade, your portfolio missed out on having an MVP player in the game. Shelton Nasdaq-100 Index Fund was that sort of game changer. Launched in January 2000 in the wake of the dot-com bubble bursting, NASDX outscored 98% of its Morningstar category over the past decade.
About 45% of the fund is concentrated in its top 10 holdings. NASDX’s top five are the S&P 500’s top five as well. Roughly 80% of the fund hails from the fast growing technology, communication services and consumer cyclical sectors.
Sure, NASDX’s stellar performance comes at a price. The fund’s P/E ratio is around a lofty 30. But that’s less costly than its Morningstar category’s average around 24.
Schwab Fundamental US Large Company Index Fund (SFLNX)
Expense ratio
0.25%
Dividend yield
1.78%
10-year avg. ann. return
10.98%
0.25%
1.78%
10.98%
Editor's Take
If you expect lots of market volatility, the Schwab Fundamental US Large Company Index Fund may be for you. Instead of weighting its holdings by market capitalization, which is common among index funds, SFLNX invests in each company based on what Schwab calls fundamental measures.
Here’s what that means: Each time SFLNX rebalances, it is moving money into stocks whose prices have declined relative to certain fundamentals. Why do that? SFLNX bets on reversion to the mean. It expects stocks that have pulled back to rally.
That approach makes SFLNX a contrarian, value-oriented fund, which shines during brief periods of outperformance. Just remember, its returns can languish when a reversion to the mean takes too long.
Fidelity Intermediate Municipal Income Fund (FLTMX)
Expense ratio
0.36%
Dividend yield
2.54%
10-year avg. ann. return
2.10%
0.36%
2.54%
2.10%
Editor's Take
Fidelity Intermediate Municipal Income Fund focuses on bonds with a dollar-weighted average maturity between three and 10 years. Normally, at least 80% of its bonds are investment grade and generate income that is exempt from federal taxes. Its 2.47% yield is equivalent to a 3.293% taxable yield for taxpayers in the 25% bracket.
FLTMX is managed by an experienced team and selects bonds based upon various factors including credit quality, coupons, call features and mismatches between price and value. The fund sports an average weighted maturity of roughly five years.
If the Federal Reserve is about to start reducing interest rates, bond investors should expect to see prices rise and yields fall on bonds and bond funds, Fidelity says.
About 90% of FLTMX’s diversified bonds are rated A or better, minimizing default risk. If bought through the Fidelity portal, there’s no transaction fee.
Dodge & Cox Income Fund (DODIX)
Expense ratio
0.41%
Dividend yield
4.17%
10-year avg. ann. return
2.17%
0.41%
4.17%
2.17%
Editor's Take
Launched in January 1989, Dodge & Cox Income Fund is doing something right to endure for more than 35 years. This actively managed bond fund owns about 1,300 bonds and turns over roughly 55% of its holdings annually. The 0.41% expense ratio is fractionally better than actively managed bond mutual funds on average.
The fund managers employ fundamental research and screen for yield, credit quality, liquidity, call risk, duration and appreciation potential. There’s even a nod to ESG factors.
The fund’s average effective duration is under six years. That’s slightly lower than the Bloomberg U.S. Aggregate Bond Index, a widely followed benchmark. As an intermediate term bond fund, DODIX offers somewhat higher yield and a better 10-year total return than its Morningstar category averages.
Schwab Fundamental US Small Company Index (SFSNX)
Expense ratio
0.25%
Dividend yield
1.41%
10-year avg. ann. return
8.15%
0.25%
1.41%
8.15%
Editor's Take
Small companies generally are nimble and able to grow faster than their larger cap brethren. To capture the tendency of small-cap stocks to outperform versus large caps over long periods, the Schwab Fundamental US Small Company Index Fund weights its holdings based on sales, cash flow and dividends plus buybacks, all over the prior five years. Unlike a market-cap weighted fund, SFSNX tends to be value oriented.
SFSNX is well-diversified. Its top 10 holdings contribute only 3% of the fund’s value. Roughly 50% of the holdings reside within the industrials, consumer cyclicals and financial services sectors.
Investors seeking a fund that beat its Morningstar category averages over the past one, three, five and 10 years need look no further than SFSNX.
T. Rowe Price Mid-Cap Growth Fund (RPMGX)
Expense ratio
0.77%
Dividend yield
0.06%
10-year avg. ann. return
10.72%
0.77%
0.06%
10.72%
Editor's Take
Brian Berghuis has been at the helm of this T. Rowe Price Mid-Cap Growth Fund since its birth in 1992. Unlike many growth fund managers, Berghuis considers valuations and seeks out companies with sustainable business models. He looks for companies whose managers can grow revenues or earnings by 12% or more annually. The fund eschews companies with unjustifiably high valuations, which aren’t supported by cash flow and strong earnings.
RPMGX beat its mid-cap growth category’s returns during the past three, 10 and 15 years. With a fairly low annual turnover rate around 21% and a disciplined focus on valuations, you can think of this fund as a “conservative” growth offering. Morningstar classifies RPMGX as lower risk with higher returns than its category average. RPMGX is worth weighing by Investors who want the growth of mid-caps with less volatility than the fund’s category.
*Data from Morningstar Direct unless noted; current as of April 30, 2024; returns since inception are through April 30, 2024.
Methodology
To identify the 10 best mutual funds, we screened the roughly 10,000 funds available for those in the top 33.2% of returns over a mix of three, five and 10 years. We also screened for the bottom 10% of expense ratios. And we discarded any whose minimum initial investment exceeds $3,000.
We then eliminated sector funds as well as narrowly focused mutual funds that concentrate on a specific geographical region or industry group. Money market funds were also excluded. In addition, we excluded alternative, commodity and stock-plus-bond funds. Those steps winnowed our list down to 176 funds.
After identifying each fund’s Morningstar category, we selected a mix of active and passively managed funds.
Our final list included those funds that beat competitor category returns over 10 years, as well as some funds that also outperformed their index returns. For the one fund that is not 10 years old, we insisted on outperformance versus its category average since inception.
Our best equity list spanned value, growth and blend investment styles. We also chose market-capitalization and fundamental strategies. We included representation from large-, mid- and small-cap firms as well. A sustainable equity fund was selected for socially responsible investors. The bond categories included municipal bonds, for those in higher tax brackets, as well as long and intermediate term fixed income funds.
What Is a Mutual Fund?
A mutual fund pools money from many participants to buy a portfolio of stocks, bonds and other securities. The fund sells shares to investors, with each share representing an equity ownership stake in the mutual fund and the income it generates.
Mutual funds offer investors an excellent source of diversification for their portfolios. These funds typically own hundreds or even thousands of different securities.
The securities a mutual fund buys depends on the fund’s investment objectives. For example, a growth fund will target stocks with above-average growth potential, while an income fund may include both dividend-paying stocks and bonds.
How Do Mutual Funds Work?
Each share of a mutual fund represents a prorated amount of all the investments within the fund. If 10% of a mutual fund’s portfolio is in shares of Tesla, 5% Comcast (CMCSA) and 2% The Cheesecake Factory (CAKE), each fund investor reaps the appreciation, or loss, for these holdings in equal proportions.
It’s important to remember that you don’t own the underlying securities held by a mutual fund. Instead, you own a share of the fund itself. In the above example, you wouldn’t own the shares of Tesla, Comcast and The Cheesecake Factory; you would own shares of the mutual fund which in turn owns these companies.
Investors receive the profits and income generated by the mutual fund’s holdings through distributions. They can choose to take the distributions as cash or reinvest them in the fund.
Shares of mutual funds trade on stock exchanges like stocks, but they operate a little differently. They trade only once a day, at the market close. They’re not exchanged between investors; instead, you buy and sell them directly with the fund manager.
At the end of each trading day, the fund manager calculates the net asset value, or NAV, of the securities in the fund, then sells or redeems fund shares at this price. For investors, this means that you won’t know the price you’ll pay or receive until after the market closes.
Mutual Fund Fees
Mutual fund managers pass on the costs of operating the fund to investors via various fees and expenses.
Funds may charge a variety of different fees, so you need to be aware of the different ways you can be charged. You can see what fees a given mutual fund charges in the fund’s prospectus under the “Shareholder Fees” section. Fees may include:
- Expense ratio. The most common fee, this represents the percentage of the money you invest in the fund that will go to covering the fund’s cost, rather than generating a return on your investment. Almost all mutual funds will have an expense ratio, and the cost will be higher for funds with active management than passive management.
- Sales load. A sales commission paid to brokers for selling you shares of the fund. These can be charged when you purchase shares—“front-end sales loads”—or when you sell your shares—“back-end sales loads.” Look for “no-load mutual funds” to avoid paying these fees.
- 12b-1 fees. Fees deducted from fund assets to pay for marketing and distribution expenses incurred by the fund.
- Redemption fees. This fee is deducted from your proceeds when you sell shares of the mutual fund.
- Exchange fees. Charged if you exchange shares of one mutual fund for another fund in the same group.
- Purchase fees. A fee charged when you purchase shares of a mutual fund.
You always want to minimize the fees you pay, since they eat into returns. Even seemingly small fees can lead to big changes in long-term returns, thanks to compounding. For example, a mere 1% increase in fees on a $10,000 investment that earns 10% per year can cost you more than $10,000 over 20 years.
Mutual Fund Taxes
You will likely pay taxes on mutual fund distributions if you own funds in a taxable brokerage account. If you sell shares at a profit, you’ll need to report the transaction on your tax return. This is true even if you only move money between mutual funds without taking any out as cash.
Most mutual funds pay distributions at the end of the year. You’ll receive an IRS Form 1099-DIV each year detailing the distributions that were paid to you in that calendar year.
How much you pay in taxes will depend on the type of distribution. For example, proceeds from selling a mutual fund you held for more than one year are typically taxed at more favorable capital gains tax rates while short-term capital gains from funds you held for one year or less are taxed as ordinary income.
The exception to the tax rules are qualified accounts like individual retirement accounts, which are only taxed when you withdraw funds from the account.
The Different Types of Mutual Funds
Mutual funds can be classified based on the types of investments they hold:
- Stock mutual funds. Also called equity funds, this type of mutual fund owns shares of stock in public companies. Equity fund investors generally want more appreciation than income payments—or yield—although there are specialized dividend funds that aim to generate yield.
- Bond mutual funds. Also referred to as fixed-income funds, this kind of mutual fund owns Treasurys, municipal bonds or corporate bonds. Bond fund investors tend to want income preservation and yield.
- Balanced funds. Also called blended funds, these mutual funds invest in a portfolio of both stocks and bonds.
- Money market mutual funds. These mutual funds tend to offer very low yields and very low risk compared with bond and equity funds. Instead of appreciation or yield, money market fund investors are looking to preserve the value of their cash above all else.
- Target date funds. These funds are designed for retirement investors and generally have a “target date” year when holders are expected to retire. They hold a mix of stocks, bonds and other securities. Over time, the portfolio shifts its allocation from riskier investments to safer investments.
How To Invest in Mutual Funds
You can invest in mutual funds through an online broker just as you would stocks, but most people buy mutual funds in their 401(k) account or IRA.
When investing in mutual funds, keep your investment goals in mind as this will dictate the type of mutual fund you may want to use. For example, long-term goals that are decades in the future may be best served by stock mutual funds with more growth potential while shorter-term goals in the next few years may require the relative stability of a bond fund.
Also keep an eye on fees. Remember that fees reduce overall returns. The industry average expense ratio is 0.57%, but many funds charge much less. There are even zero expense ratio funds, such as Fidelity Investment’s Zero Funds.
Why Invest in Mutual Funds?
Mutual funds offer an attractive combination of features that make them a good option for many individual investors. These include:
- Diversification. The shortest definition of diversification is simply “never put all your eggs in one basket.” Mutual funds embody this approach as they own a portfolio of securities that includes a very broad range of companies and industries. This helps to lower risk and potentially boost returns.
- Affordability. Mutual funds typically have low minimum investment requirements and charge reasonable annual fees.
- Professional management. Not everyone has the time and knowledge to manage a diversified investment portfolio. When you buy shares of a mutual fund, the fees pay professional managers to choose the securities owned by the fund and manage the assets through good markets and bad.
- Liquidity. When you own shares of a mutual fund, you can easily redeem them at any time. The fund will always buy back your shares for an amount equal to the current NAV plus any redemption fees.
When you invest in a mutual fund, you get instant diversification as every dollar is invested in the underlying securities at the same proportion as the overall fund. So even if you put $1 in a fund with 100 securities, your $1 will be spread across all 100 securities. Similarly, your $1 will benefit from the same professional management as an investor with $100,000 in the fund.
How To Choose the Best Mutual Funds
There are thousands of mutual funds available on the market today. That means you need a good understanding of your financial goals to choose the right mutual fund for your needs.
Are you investing for retirement in your 401(k) account? Which is more important, long-term capital gains or recurring income today? Answering questions like these about your financial goals are essential before you begin diving into the world of the best mutual funds.
After you’ve determined clear goals, you should also understand your risk tolerance. Are you willing to see big swings in the value of your mutual fund over the short term in exchange for better gains over the longer term? Would you be more comfortable with a steady, gradual rate of appreciation plus reliable income payments?
You may already understand that risk and return are directly proportional. That makes it essential to calibrate the rate of return you expect against the amount of volatility you can accept in your mutual fund investments.
Once you’ve settled on a level of risk that’s right for you, you’ll need to start digging into mutual fund lists like this one and start researching individual funds. Learning about how each fund works helps you know if it’s right for your goals and risk tolerance.
Learn about each fund’s management team. Do they have a history of success? For active funds like we have listed above, it’s important to read the managers’ track record.
Does a fund have a high or low turnover rate in its investments? When fund managers buy and sell frequently, it creates taxable events. That’s nothing to worry about if you own shares of a mutual fund in a tax-advantaged retirement account, but if you own shares in your taxable brokerage account, that could greatly diminish your long-term gains.
Mutual Fund FAQs
What are the benefits of mutual funds?
Mutual funds offer benefits to investors by giving them a secure and diversified portfolio of investments. They generate returns for shareholders via:
• Capital gains distributions. When mutual fund managers see that the value of portfolio holdings has increased, they may sell assets from time to time. Sales generate capital gains, and at year-end, the fund distributes capital gains—minus any capital losses—to shareholders.
• Dividend payments. Mutual funds receive income from bond interest yield or stocks that pay dividends. Funds return this income to shareholders periodically.
• Portfolio appreciation. When the market value of a mutual fund’s overall portfolio rises, the value of the fund’s shares increases. Gains in NAV of a mutual fund reflect the higher value of your mutual fund shares.
What are the risks of mutual funds?
All investments involve taking on risk, and mutual funds are no exception. You may lose some or even all of the money you invest in a mutual fund. The value of the fund’s portfolio may decline, and bond interest payments or stock dividends can fall as market conditions change.
Past performance is less important with mutual funds as it does not predict future returns. Nevertheless, a mutual fund’s performance can give you an idea of how volatile or stable it’s been in the past.
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