How Does My Mutual Fund Performance Compare to Others?

How to Evaluate Mutual Fund Performance: A Simple Guide for Investors

When you're considering investing in mutual funds, evaluating their performance is key to making smart choices. But with so much data available, it can be hard to know which factors really matter.

In this guide, we’ll break down what to look for when judging a mutual fund’s performance, and we’ll provide real-life examples of funds that performed well and others that didn’t—so you can avoid common pitfalls.

Key Factors to Consider When Evaluating Mutual Fund Performance

1. Historical Returns (Most Important)

Looking at a fund’s past returns over different time periods—1 year, 3 years, 5 years, and 10 years—gives you a snapshot of how it’s performed. But remember, past performance doesn’t guarantee future results. The idea is to see how well the fund has weathered different market conditions and whether it has a history of providing consistent returns.

• Example of a High Performer: Vanguard 500 Index Fund (VFIAX)
  Over the past 10 years, VFIAX has averaged about 12% in annual returns, making it a top choice for long-term growth. It mirrors the S&P 500, which includes the largest companies in the U.S. By sticking with a diverse set of strong, reliable stocks, this fund has consistently outperformed many actively managed funds.
• Example of a Poor Performer: Invesco Energy Fund (IENAX)
  This fund focuses on the energy sector, which has been volatile. Over the last 10 years, it has averaged around 1-2% annually. The energy market has faced challenges like oil price collapses, making this fund struggle to generate strong returns. Investing in a sector-specific fund can be risky if that sector faces tough times.

2. Expense Ratio (Very Important)

The expense ratio is the annual fee a mutual fund charges to cover management and administrative costs. Lower expense ratios are better because high fees can eat into your returns, especially over the long term. Generally, index funds have lower expense ratios than actively managed funds.

• Good Example: Schwab S&P 500 Index Fund (SWPPX)
  With an expense ratio of just 0.02%, this fund is extremely cheap to own, allowing you to keep almost all of your returns. Over time, this low cost can make a huge difference.
• Low Performing Example: American Funds Capital World Growth and Income (CWGIX)
  This actively managed fund has an expense ratio of 0.77%. While it's not the highest, it's still significantly more than a low-cost index fund, which can reduce your overall returns, especially if the fund doesn’t consistently outperform the market.

3. Risk-Adjusted Return (Important)

A fund may have high returns, but at what cost? Risk-adjusted return considers how much risk the fund took to achieve those returns. Two common metrics to assess risk-adjusted return are the Sharpe Ratio and Sortino Ratio. The higher the ratio, the better the fund’s returns relative to the risk it took.

• Example: T. Rowe Price Blue Chip Growth Fund (TRBCX)
  TRBCX has delivered strong long-term returns while maintaining a solid Sharpe Ratio, indicating that it has outperformed with reasonable risk. This fund focuses on large, stable companies with growth potential, making it a relatively safer option for investors seeking growth.

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

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4. Consistency of Returns (Very Important)

You want to look for funds that have consistently performed well over time, not just in short bursts. Consistency shows that the fund manager has a good strategy and isn’t relying on luck or favorable market conditions.

• Good Example: Dodge & Cox Stock Fund (DODGX)
  This fund has been around for decades and has delivered strong, consistent returns across different market cycles. Its long-term approach to value investing has helped it weather both bull and bear markets.
• Bad Example: Janus Henderson Global Life Sciences Fund (JFNAX)
  While this fund has had years of strong performance, it has also had periods of extreme volatility. It focuses on biotech and healthcare stocks, which can be highly unpredictable, making it hard to rely on for steady long-term growth.

5. Fund Manager’s Tenure (Moderately Important)

A strong, experienced fund manager can make a big difference in how well a fund performs. When a manager has been with a fund for many years, they’ve likely weathered different market conditions and fine-tuned their strategy. Frequent changes in management can be a red flag.

• Example: Fidelity Contrafund (FCNTX)
  This fund has been managed by Will Danoff for over 30 years, and his expertise and consistent leadership have made it one of the most reliable large-cap growth funds on the market.

6. Turnover Ratio (Moderately Important)

The turnover ratio tells you how often a fund buys and sells its assets. High turnover can lead to higher costs due to transaction fees and taxes, especially in taxable accounts. A turnover ratio under 50% is generally considered good.

• Good Example: Vanguard Total Stock Market Index Fund (VTSAX)
  VTSAX has a low turnover ratio of around 5%. This means the fund isn’t frequently trading stocks, which keeps costs down and makes it a tax-efficient option.
• Bad Example: Federated Kaufmann Small Cap Fund (FKKSX)
  With a turnover ratio of over 100%, this fund trades frequently, which can lead to higher transaction costs and taxes, reducing net returns to investors.

7. Morningstar Rating (Helpful, but Not the Only Factor)

Many investors look to the Morningstar star rating as an easy way to assess a fund. While it’s useful as a general guideline, it shouldn’t be the only thing you look at. The rating is based on past performance relative to risk, expenses, and similar funds, but it doesn’t predict future success.

• Good Example: T. Rowe Price New Horizons Fund (PRNHX)
  PRNHX has a five-star Morningstar rating and has delivered excellent long-term performance in the small-cap growth category. However, it’s still essential to dig deeper into its risk profile and returns to ensure it aligns with your goals.

Less Important Factors

1. Short-Term Performance

Focusing too much on 1-year or 6-month returns can be misleading. A mutual fund’s performance in the short term can be influenced by temporary market fluctuations that don’t reflect its long-term potential. Instead, focus on the fund’s performance over 5- and 10-year periods.

2. Fund Size

While a massive fund size can indicate popularity, it doesn't always mean better performance. Some large funds may struggle to find enough good investments, while smaller funds might have more flexibility to outperform. It’s best to focus on returns, not the size of the fund.

3. The Latest Hot Trend

Funds that focus on hot sectors, like technology or cryptocurrency, can experience sudden surges in popularity, but they may also see significant downturns. Chasing the latest trend can be risky. Stick to your investment plan and choose funds with strong, long-term track records.

Examples of Well-Performing Funds and Why They Succeeded

• Fidelity 500 Index Fund (FXAIX): This fund consistently delivers returns that match the S&P 500, with low fees and a long history of solid performance. Its passive management approach reduces costs and makes it a reliable option for long-term investors.
• American Funds Growth Fund of America (AGTHX): With a diversified portfolio of large, growth-oriented companies, this fund has consistently outperformed over the years. Its strong management team and disciplined investment strategy have helped it thrive.

Examples of Underperforming Funds and Why They Failed

• Putnam Equity Income Fund (PEYAX): This fund has struggled in recent years, delivering below-average returns for its category. High fees and poor stock selection have weighed it down, making it an underwhelming choice compared to similar funds.
• Franklin Gold and Precious Metals Fund (FKRCX): This fund focuses on the volatile metals and mining sector, which has had a rough decade. While it has potential during periods of rising gold prices, it’s underperformed in the long term due to fluctuating commodity prices and high-risk investments.

Focus on Long-Term Performance and Costs

When evaluating mutual funds, prioritize long-term performance, consistency, and fees. Avoid the temptation to chase short-term gains or trendy sectors.

The most successful investors stick with solid, reliable funds that align with their financial goals, risk tolerance, and time horizon. By focusing on the right factors, you can confidently choose mutual funds that will help you achieve your investment objectives. 

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