If you’re starting to invest, or are looking to diversify your portfolio, mutual funds are a great option. But with so many different types of mutual funds available, how do you choose the best one for your investment goals?
In this article, we’ll give you an introduction to mutual funds and share our top picks for different investment goals.
What is a mutual fund?
A mutual fund is a type of investment vehicle that pools money from many investors and invests it in a variety of assets, such as stocks, bonds, and short-term debt.
The fund is actively managed by a professional money manager who seeks to grow the fund’s assets and generate income for investors.
Benefits of mutual funds
Mutual funds offer several advantages over other types of investments:
- They provide professional management: When you invest in a mutual fund, you benefit from the expertise of a professional money manager who oversees the fund’s investments.
- They offer diversification: Mutual funds allow you to diversify your portfolio without having to buy individual stocks and bonds. This diversification can help reduce your risk.
- They’re relatively low-risk: Because they’re diversified, mutual funds tend to be less risky than investing in individual stocks or bonds.
- They’re liquid: Mutual fund shares can be easily bought and sold on the open market.
- They offer flexibility: You can choose from a variety of investment objectives, such as growth or income.
Different types of mutual funds
There are different types of mutual funds available to investors, each with its own set of investment objectives and strategies.
The most common types of mutual funds are stock funds, bond funds, and money market funds.
Stock mutual funds
Stock mutual funds invest in a portfolio of stocks, which may include large-cap stocks, small-cap stocks, international stocks, or a combination of these.
The fund’s investment objective will dictate the type of stocks that are selected for the portfolio.
E.g., a fund with an aggressive growth objective may invest primarily in small-cap stocks that have the potential for high capital appreciation.
Bond mutual funds
Bond mutual funds invest in a portfolio of bonds, which may include government bonds, corporate bonds, or a combination of these and other securities.
The fund’s investment objective will dictate the type of bond selected for the portfolio.
E.g., a bond fund with an income objective may invest primarily in high-yield corporate bonds that offer higher interest payments than government bonds.
Money market funds
Money market mutual funds invest in short-term debt instruments such as Treasury bills and commercial paper.
Money market funds are typically used as a cash management tool by investors who want to earn a higher yield on their cash balances than what is offered by traditional savings accounts.
Equity funds
These mutual funds primarily invest in stocks and equity-related instruments. They may be further classified based on market capitalization (large-cap, mid-cap, small-cap), sector (technology, healthcare, energy, etc.), or investment style (value, growth, blend).
Fixed-income funds
These mutual funds primarily invest in fixed-income securities like bonds, treasury bills, and corporate debt.
They may be further classified based on the duration of the bonds they hold (short-term, intermediate-term, long-term), the credit rating (investment-grade, high-yield), or the type of bonds (government, municipal, corporate).
Balanced funds
These mutual funds invest in stocks and bonds to provide a balanced portfolio. They aim to generate capital appreciation through equity investments while providing a stable income stream through fixed-income investments.
Index funds
These mutual funds track a market index like the S&P 500, Dow Jones Industrial Average, or Nasdaq Composite. They aim to provide returns that closely match the performance of the underlying index.
International funds
These mutual funds invest in securities of companies located outside the US. They may be further classified based on the region, stock market or country they invest foreign stocks in.
Specialty funds
These mutual funds invest in specific sectors or themes through money market instruments like equity market real estate, commodities, or socially responsible investments.
Target-date funds
These mutual funds have a pre-determined retirement date and adjust the portfolio allocation to become more conservative as the market value as the target date approaches.
They aim to provide a diversified portfolio suitable for investors with a specific retirement timeline.
Benefits of investing in mutual funds
There are many benefits of investing in mutual funds including the following:
- Diversification: Mutual funds allow you to diversify your investment portfolio across a wide range of asset classes, including stocks, bonds, and cash. This diversification can help to reduce the overall risk of your investment portfolio.
- Professional management: Mutual fund managers are professional investors who have the expertise and experience to select investments that have the potential to provide superior returns.
- Convenience: Investing in mutual funds is convenient because you can purchase shares through a broker or financial advisor. Additionally, for most mutual funds, fund companies offer online account access, making it easy to track your investment performance.
10 top mutual funds to invest in
When it comes to mutual funds, there are a lot of different options to choose from. This can make it tough to decide which one is right for you and your investment goals.
However, there are a few things that you can keep in mind that will help you choose the best mutual fund for your needs.
Here are our top picks:
| Fund Name | Dividend Frequency | 3-Year Return | 1-Year Return | |
| 1 | Vanguard 500 Index Fund | Quarterly | 16.1% | -7.2% |
| 2 | Fidelity Contrafund | Semiannual | 14.3% | -5.8% |
| 3 | Fidelity Government Money Market Fund | Daily | 0.8% | 2.9% |
| 4 | American Funds Washington Mutual F1 | Quarterly | 12.7% | -3.1% |
| 5 | Vanguard Total Bond Market Index Fund | Daily | -0.2% | 3.5% |
| 6 | Vanguard Total Stock Market Index Fund | Quarterly | 15.6% | -8.1% |
| 7 | Goldman Sachs FS Government Fund | Daily | 0.7% | 2.7% |
| 8 | Vanguard Institutional Index Fund | Quarterly | 16.2% | 7.1% |
| 9 | JPMorgan US Government Money Market Fund | Daily | 0.9% | 3.1% |
| 10 | American Funds Growth Fund of America | Annually | 11.8% | 12.5% |
1. Vanguard 500 Index Fund (VSMPX)
This fund is a great option for those who want to invest in large-cap stocks. It offers a low expense ratio and has a solid track record of performance.
The fund tracks the performance of the S&P 500, its benchmark index.
It’s a passively managed fund, which means that its goal is to match the performance of the S&P 500 rather than trying to outperform it.
The fund is also popular among investors who favor a passive investment strategy, as it provides broad exposure to the U.S. stock market while minimizing the need for active decision-making.
2. Fidelity® Contrafund® (FCNTX)
The Fidelity® Contrafund® is a mutual fund offered by Fidelity Investments, one of the largest investment management companies in the world.
This fund is a good choice for those who want to invest in growth stocks. It has a strong track record and is an actively managed fund, by an experienced team.
The fund’s investment style is classified as “large-cap growth,” which means that it focuses on investing in large companies that are expected to experience above-average growth in earnings and revenues.
Since its inception in 1967, the fund has outperformed its benchmark index, the S&P 500, by a significant margin.
3. Fidelity Government Money Market Fund (SPAXX)
The Fidelity Government Money Market Fund is a mutual fund offered by Fidelity Investments that invests primarily in high-quality, short-term U.S. government debt securities.
The fund invests in U.S. government securities, including Treasury bills, notes, and bonds, as well as repurchase agreements collateralized by U.S. government securities.
The Fidelity Government Money Market Fund is considered to be a conservative investment option and is often used by investors as a short-term cash management tool or a place to park funds while waiting to deploy them into other investments.
4. American Funds Washington Mutual F1 (WSHFX)
The American Funds Washington Mutual F1’s investment objective is to provide long-term growth of capital and income by investing mainly in common stocks.
It has a long-term track record of strong performance. The fund has outperformed its benchmark index, the S&P 500, over multiple time periods, and has received high ratings from several industry publications and rating agencies.
This mutual fund is offered by the American Funds family of mutual funds, which is managed by Capital Group, one of the largest investment management companies in the world.
5. Vanguard Total Bond Market Index Fund (VBTLX)
The Vanguard Total Bond Market Index Fund seeks to track the performance of the Bloomberg Barclays U.S. Aggregate Float Adjusted Index, a broad market index that measures the performance of the U.S. investment-grade bond market.
The fund invests in a diversified portfolio of high-quality U.S. government, corporate, and mortgage-backed securities with maturities ranging from one to 30 years.
The Vanguard Total Bond Market Index Fund is considered to be a conservative investment option and is often used by investors as a core holding in their investment portfolios to provide diversification and income.
This fund is considered to be a low credit risk, low-cost option.
6. Vanguard Total Stock Market Index Fund (CSMPX)
The Vanguard Total Stock Market Index Fund provides investors with exposure to the entire U.S. equity market by investing in a diversified portfolio of stocks across all sectors and industries.
The fund tracks the performance of the CRSP US Total Market Index, which includes all U.S. common stocks listed on the NYSE, NASDAQ, and other U.S. exchanges.
The Vanguard Total Stock Market Index Fund has a long-term track record of strong performance and is often used as a core holding in many investors’ portfolios.
7. Goldman Sachs FS Government Fund (FGTXX)
The Goldman Sachs FS Government Fund is a mutual fund offered by Goldman Sachs Asset Management. It provides a high level of current income consistent with the preservation of capital and liquidity by investing primarily in U.S. government securities, including Treasury bills, notes, and bonds.
The fund’s investment strategy is focused on maintaining a high credit-quality portfolio with low average maturity.
8. Vanguard Institutional Index Fund (VIIIX)
Vanguard Institutional Index Fund provides investors with exposure to the U.S. equity market by investing in a diversified portfolio of large-cap stocks that make up the S&P 500 Index.
With an expense ratio of 4.0%, Vanguard Institutional Index Fund’s fees are low compared to other funds in the same category.
The fund is primarily intended for institutional investors, such as pension plans, endowments, and other large organizations. However, individual investors can also invest in the fund through a financial advisor or a brokerage account.
9. JPMorgan US Government Money Market Fund (OGVXX)
The JPMorgan US Government Money Market Fund mainly invests in short-term U.S. government debt securities. The fund’s objective is to provide current income while maintaining a stable net asset value of $1 per share.
The fund invests in U.S. government securities like Treasury bills, notes, and bonds, as well as repurchase agreements collateralized by U.S. government securities.
It is considered to be a conservative investment option and is often used by investors as a short-term cash management tool or a place to park funds while waiting to deploy them into other investments.
10. American Funds Growth Fund of America (AGTHX)
The American Funds Growth Fund of America is a mutual fund offered by American Funds, a subsidiary of Capital Group.
The fund’s objective is to provide long-term growth of capital by investing in a diversified portfolio of high-quality, large-cap U.S. stocks that the fund’s management team believes have strong growth potential.
The fund’s portfolio is well-diversified across a range of sectors and industries, and the management team actively manages the fund’s asset allocation to maintain its investment objectives.
The American Funds Growth Fund of America is considered to be a growth-oriented investment option and is often used by investors as a core holding in their long-term investment portfolios.
How to Choose the Right Mutual Fund?
When choosing a balanced mutual fund or fund, there are several things you should take into account:
- Your investment goals: What are you looking to achieve with your investment? Are you aiming for long-term capital gains, and-term growth, or are you more interested in generating income in the short term?
- Your risk tolerance: How much risk are you willing to take on? Are you comfortable with volatile markets, or do you prefer a more stable, investment strategy?
- The fund’s expense ratio: This is the annual fee that the fund charges and it can eat into your returns if it’s too high. Look for a fund with a low expense ratio.
- The fund’s performance: Past performance is not necessarily indicative of future results, but it can give you an idea of how the fund’s holdings have performed in different market conditions.
- The mutual fund’s own strategy: Make sure that the fund’s strategy aligns with your investment goals and risk tolerance. For example, if you’re looking for long-term growth, a stock-based mutual fund may be a good choice.
But if you’re more interested in generating income in the short term, a bond-based mutual fund may be a better option.
Alternatives to Mutual Funds
Exchange Traded Funds
Exchange Traded Funds (ETFs) are similar to mutual funds but trade on stock exchanges like individual stocks. They offer diversification and flexibility with lower expense ratios and no minimum investment requirements.
Index Funds
These funds are designed to track a specific market index like the S&P 500. They have lower fees than actively managed mutual funds and provide broad market exposure.
Individual Stocks
You can invest in individual stocks of companies you believe in and expect long-term growth from. However, this option requires more research and knowledge of the stock market.
Bonds
Bonds are debt securities that provide a fixed income stream for a specified period. They are considered safer investments than stocks and can be purchased through mutual funds or individual bond issues.
Real Estate Investment Trusts (REITs)
REITs allow investors to invest in real estate without owning physical property. They provide regular income and have tax advantages.
Certificate of Deposit (CDs)
Certificates of Deposit (CDs) are savings accounts that pay higher interest rates in exchange for a fixed-term commitment. They offer a low-risk investment option for conservative investors.
Conclusion
Investing in mutual funds is a great way to diversify your financial portfolio and can help you reach your investment goals.
By researching the different types of mutual funds, understanding the associated risks, and selecting the best fund for your individual needs, you can ensure that you are making a sound decision when it comes to investing.
