Best Mutual Funds
To find the best mutual funds investors often look to the historical performance of a fund before committing to the purchase. But this is only one way of measuring how well a fund has done over the past several years or since its inception. Consistency of returns and level of risk tolerance are also important considerations.
It's important to understand that risk tolerance doesn't just refer to your ability to tolerate market volatility emotionally. It also refers to your age, the amount of money you have saved, how near you are to retirement, and how you want to use the money you're investing. A retired 75-year old investor with few assets has a very low risk tolerance. This investor cannot afford to take risks with his or her portfolio because there's no way to make up losses. One the other hand, a 30-year old conservative investor has a larger risk tolerance because he or she has time to make up any losses that would occur, or to offset several years of low growth. Matching the right fund to the proper level of historical performance and risk tolerance is key to investing in the right mutual funds.
Understanding the Historical Performance of a Mutual Fund
The historical performance is often a misleading indicator of mutual fund performance. First, fund companies rarely deduct fees, expenses, and taxes from the growth rates they advertise. Since fees and expenses on actively managed funds can be as high as 2%-3%, this is significant. And taxes, especially short-term capital gains, can take another significant chunk out of earnings. Second, fund companies don't always specify which index they're comparing the fund to when they say they beat the average or returned more than a competitor.
Most funds companies list historical performance for the past one, three, five, and ten years. When reviewing this information, it's a good idea to take a look back and see what the markets have done over these time periods. If an index has returned 3% in the past year, see how closely the fund came to that. But be careful with the longer time periods. Depending on how and when the timeframes are calculated, the returns could be artificially inflated. When reviewing returns over several years, it's more important to look at consistency. Does the fund do well even in down markets? Or, do gains and losses swing drastically from one year to the next? Remember that a fund that is up 15% one year, 12% the next and 0% the next will list the average return for the past three years as 9%. On the other hand, a fund that returns even 1% in a year then the S&P500 was down 10%, actually did very well. So make sure your comparisons are done in proper context.
Best Mutual Funds for Investors Ages 25 to 35
Younger investors almost always do better with aggressive growth funds or specialty funds. These funds hold stocks that are usually poised to increase significantly over several decades and provide the biggest potential for an increase in wealth. Because they have a much longer investing time horizon, younger investors should be encouraged to take more risks, without being foolish, of course. But between the ages of 25 and 35 is when the basis of the portfolio should be built. The money saved and returns earned during this time period are what will compound and grow to create a sizeable nest egg later.
Best Mutual Funds for Investors Between 35 and 45Between the ages of 35 and 45, investors may want to begin changing their mutual fund allocations to less aggressive growth funds and value funds. Growth funds are still needed, but as investors age, they need to shift into less risky investments. The reinvested dividends from the stocks within the value funds will help cushion a decrease in share price, market downturns, and allow the purchase of additional shares at lower rates.
Whether investors in this age group choose to hold bond funds for income is a matter of personal preference. While most financial planners will recommend at least a small percentage of assets in bond funds, a high-yield bond fund would be a good, aggressive choice.
Best Mutual Funds for Those Who are 45 to 60
Investors between the ages of 45 and 60 often face a complicated array of choices when it comes to choosing the best mutual funds. They need the capital appreciation of growth funds combined with a rather conservative approach to capital preservation. Further, investors in this age group are often struggling to pay for a child's college education and an elderly parent's financial needs as well. This group, above all, needs to remember that the 15 years between 45 and 60 are important savings years. Regardless of other financial obligations, they need to make sure they continue to save.
Balanced funds are often best for these investors. They provide capital appreciation along with the relative security of the fixed returns of bonds. While the returns of a balanced fund won't match those of growth funds, it will at least offer greater protection. As for the best bond funds for this group, a mix of high-yield bonds and U.S. Treasuries should provide stability and liquidity. ETFs that specialize in certain safer market segments can also be considered for their lower costs and higher tax efficiencies.
Best Mutual Funds for Retirees
The best mutual funds for retirees are those that focus on capital preservation. While retirees also need to ensure some capital appreciation, they always need to make sure that the funds they choose do not result in significant losses. Fixed income funds, especially those that specialize in longer-term U.S. Treasuries, preserve capital while offering some appreciation.
Older investors who enjoy the excitement of market participation may choose to invest in value and index funds. A value fund may take awhile to appreciate, but it will contain stocks that pay dividends. And those dividends can be quite significant for stocks that are really beaten down. Even if the fund doesn't appreciate, the dividends will add to the overall increase in value. Index funds especially should be considered for their low expense rations and growth. A fund that tracks the larger S&P 500 or even the Wilshire 5000 will not experience the extreme volatility of a sector fund or even a fund that tracks the Dow 30.
Always make sure the objective of the fund matches your investment objectives. Researching the historical performance of a fund, the consistency of returns, and assessing your level of risk tolerance will enable you to put together a great portfolio of funds.
While we've covered the basics of mutual fund investing here, there is much more to maximizing the success of your fund investment strategy. To make sure you're on the right track, contact a licensed financial advisor. It only takes a few minutes, Start Now.
More Mutual Fund Guidance
- Mutual Funds Investment Guide — The complete guide to mutual fund investing.
- Equity and Bond Funds — Understanding how equity and bond funds work.
- Balanced, Index, and Specialty Funds — Comparing balanced, index, and specialy funds.
- Exchange Traded Funds — Explore how EFTs compare to traditional funds.
- Money Market Funds — Explore how money market funds work.
- Mutual Funds FAQ — Frequently asked questions about mutual fund investing.