How Do Your Average Returns Compare to These Mutual Fund Types

What Are Average Returns on Mutual Funds?

When you're investing in mutual funds, you're probably curious about one thing: How much money can I make? Mutual funds offer a great way to invest in a variety of assets, and their returns vary depending on the type of fund, market conditions, and the length of time you stay invested.

Let’s break down what you can expect in terms of average returns, with real-life examples of funds to help you understand.

What Are Average Returns?

The average return of a mutual fund is the amount of profit or loss the fund generates over a specific period. It's often expressed as an annual percentage. For example, if a fund averages 7% annually over 10 years, it means that, on average, your investment grew by 7% each year during that time.

However, average returns can be deceiving because markets are volatile. In one year, your fund might return 10%, but in the next year, it could drop by 5%.

That's why it’s important to think about long-term averages rather than focusing on short-term fluctuations.

Types of Mutual Funds and Their Average Returns

The returns on a mutual fund depend on the type of assets it holds. Below are some common categories of mutual funds along with their average returns.

1. Stock (Equity) Mutual Funds

Stock mutual funds invest primarily in companies’ shares and offer the potential for high returns but come with more risk. Over the long term, stock funds have tended to offer the best returns. Historically, the average return for stock mutual funds has been around 8% to 10% annually.

• Example: Vanguard 500 Index Fund (VFIAX)

  • 10-year average return: 12.19% per year.
  • This fund tracks the performance of the S&P 500, which includes 500 of the largest companies in the U.S. Like many equity funds, it tends to do well over long periods, but it may have down years when the stock market struggles.

• Example: Fidelity Contrafund (FCNTX)

  • 10-year average return: 11.14% per year.
  • This actively managed fund invests in large-cap stocks and has performed consistently well over time, making it a favorite for many long-term investors.

2. Bond (Fixed-Income) Mutual Funds

Bond mutual funds invest in government or corporate bonds, which are loans that investors give to companies or governments in exchange for interest payments. These funds typically offer lower returns but are considered safer than stock funds. Bond funds average 3% to 5% annually.

• Example: Vanguard Total Bond Market Index Fund (VBTLX)

  • 10-year average return: 2.50% per year.
  • This fund invests in a mix of U.S. government and corporate bonds, providing a steady, low-risk income for investors.

• Example: PIMCO Income Fund (PONAX)

  • 10-year average return: 4.38% per year.
  • PIMCO is known for its fixed-income expertise. This fund focuses on generating income from various types of bonds and has delivered solid, above-average returns in its category.

3. Balanced Mutual Funds

Balanced funds invest in a mix of stocks and bonds to balance growth with income. They offer more stability than pure stock funds but have higher return potential than bond funds. The average return for balanced funds is typically around 6% to 8% annually.

• Example: Vanguard Wellington Fund (VWELX)

  • 10-year average return: 8.29% per year.
  • One of the oldest and most respected balanced funds, Vanguard Wellington invests in both stocks and bonds, offering a mix of growth and income.

• Example: Fidelity Balanced Fund (FBALX)

  • 10-year average return: 8.74% per year.
  • This fund has a slightly more aggressive allocation toward stocks, providing higher returns compared to more conservative balanced funds.

4. Index Funds

Index funds aim to track the performance of a specific index, such as the S&P 500 or Dow Jones Industrial Average. Because they’re passively managed, they typically have lower fees and deliver returns similar to the index they track. Index funds have average returns of 7% to 10% annually over the long term.

• Example: Schwab S&P 500 Index Fund (SWPPX)

  • 10-year average return: 12.18% per year.
  • This fund mirrors the performance of the S&P 500 at a low cost, making it a go-to for many investors seeking to match market performance.

• Example: Vanguard Total Stock Market Index Fund (VTSAX)

  • 10-year average return: 12.29% per year.
  • This fund provides exposure to the entire U.S. stock market, offering broad diversification and a solid track record.

5. Money Market Funds

Money market funds invest in short-term, low-risk debt securities like Treasury bills. They offer safety and liquidity, but their returns are modest, averaging around 0.5% to 2% annually. These funds are often used as a place to park cash in the short term.

• Example: Vanguard Prime Money Market Fund (VMMXX)

  • 1-year average return: 1.80% per year.
  • This fund is a solid choice for investors looking for a safe place to store cash while earning modest interest.

• Example: Fidelity Government Money Market Fund (SPAXX)

  • 1-year average return: 1.90% per year.
  • Another low-risk fund that invests in government securities, it provides a small but steady return.

Read Next: The Different Types of Mutual Funds and How to Diversify

Visit our Mutual Fund Education Center

What Affects Mutual Fund Returns?

Several factors can influence the returns you get from a mutual fund:

1. Market Conditions: Stocks tend to perform well during economic growth but may suffer during recessions. Similarly, bond returns can be affected by changes in interest rates. When interest rates rise, bond prices typically fall, which can lower the returns of bond funds.

2. Fees: All mutual funds charge fees, known as the expense ratio. A high expense ratio can eat into your returns, so it’s essential to choose funds with low fees where possible. Index funds tend to have lower fees compared to actively managed funds.

3. Investment Time Horizon: The longer you stay invested, the better your chances of achieving the average return. Trying to time the market by jumping in and out can reduce your returns over the long term.

4. Dividend Reinvestment: If you choose to reinvest dividends rather than taking them as cash, your returns can grow faster thanks to the power of compounding.

How Can These Returns Help You?

Understanding average returns can help you set realistic expectations for your investments. Here's how these returns can work in your favor:

1. Setting Long-Term Goals: Knowing that stock funds historically return around 7% to 10% annually can help you plan for long-term goals like retirement or a child’s education. If you're looking for safety and income, bond funds with their 3% to 5% returns can provide steady cash flow without as much risk.

2. Beating Inflation: Over the long term, inflation erodes the value of money. With average inflation rates hovering around 2% to 3%, investing in mutual funds with returns above that threshold helps protect and grow your wealth. Stock and balanced funds, in particular, have the potential to keep your returns ahead of inflation.

3. Diversifying Your Portfolio: By including a mix of different types of funds (stocks, bonds, balanced, and money market), you can smooth out the ups and downs of your returns while still benefiting from growth in the stock market.

4. Compounding Growth: If you’re in it for the long haul and reinvest your dividends, your returns can compound over time, growing exponentially rather than linearly. This is why many investors who start early can accumulate significant wealth by retirement.

The Importance of Staying Invested

It's important to remember that while average returns can guide your expectations, markets are unpredictable. In some years, you might earn more than the average, while in others, you might see negative returns. The key to getting the most out of mutual fund investing is to stay the course.

Trying to time the market rarely works out in an investor's favor, and the real magic happens when you allow time and compounding to do their work.

Final Thoughts: Make Your Money Work for You

Investing in mutual funds is one of the best ways to grow your wealth over time, but it’s crucial to have realistic expectations.

Understanding the average returns on different types of mutual funds can help you create a strategy that suits your financial goals, risk tolerance, and time horizon. 

Whether you’re looking for growth, income, or safety, there’s a mutual fund out there with returns that can help you get ahead.

Read Next: How to Read and Understand a Mutual Fund Prospectus