7 Best-Performing Mutual Funds for February 2024 - NerdWallet (2024)

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When shopping for mutual funds, we naturally are curious: Which ones are performing the best today?

While that’s a common place to begin your search, remember you’re shopping for tomorrow when looking for the best mutual funds. Top performers in the short term don’t always become long-term winners. The best mutual funds for your portfolio won’t necessarily be the best for your parents, your siblings or your neighbors.

» Looking to fund an IRA before tax day? See our picks for best IRA accounts.

Best-performing U.S. equity mutual funds

To determine the best mutual funds measured by five-year returns, we looked at U.S. equity funds open to new investors with low costs (expense ratios of 1% or less) and minimum investment requirements of $3,000 or less.

For more on how to choose a mutual fund, skip ahead to this section.

Ticker

Name

5-year return (%)

STSEX

BlackRock Exchange BlackRock

16.47%

USBOX

Pear Tree Quality Ordinary

16.38%

PBFDX

Payson Total Return

16.30%

SSAQX

State Street US Core Equity Fund

16.20%

CORRX

Columbia Contrarian Core Adv

15.89%

FGRTX

Fidelity Mega Cap Stock

15.73%

MISEX

Midas Magic

15.64%

Source: Morningstar. Data is current as of market close on Jan. 31, 2024 and is for informational purposes only.

What is a mutual fund?

Mutual funds are companies that combine investors' money to purchase investments. Mutual funds create a more diversified portfolio than most investors can on their own. "Mutual funds" are a category that include index funds, exchange-traded funds, bond funds and target-date funds. Mutual fund investors don’t personally own the stock or other investments held by the fund, but they do share equally in the profits or losses of the fund’s total holdings.

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How to choose the best mutual funds for you

NerdWallet’s recommendation is to invest primarily through mutual funds, especially index funds, which passively track a market index such as the S&P 500. The mutual funds above are actively managed, which means they try to beat stock market performance — a strategy that often fails.

» Ready to invest? Here's our picks for best brokerages for mutual funds.

When you're ready to invest in funds, here's what to consider:

  • Decide whether to invest in active or passive funds, knowing that both performance and costs often favor passive investing.

  • Understand and scrutinize fees. A broker that offers no-transaction-fee mutual funds can help cut costs.

  • Build and manage your portfolio, checking in on and rebalancing your mix of assets once a year.

» Learn more: How to invest in mutual funds

Average mutual fund return

Managing your portfolio also means managing your expectations, and different types of mutual funds should bring different expectations for returns.

For actively managed investments, particularly those with higher fees, it is difficult to consistently beat the index. In fact, it rarely happens. Most investors would be better served with a passive investment strategy. Some investors may be best served by a combination of exchange-traded funds and mutual funds that incorporate large, mid, and small cap stocks as well as international and emerging markets.

Depending on your risk tolerance, you may want to explore bond ETFs as well. But you should always do your homework to explore which investments will make the most sense for your portfolio.

Stock mutual funds = higher potential returns (or losses)

Stock mutual funds, also known as equity mutual funds, carry the highest potential rewards, but also higher inherent risks — and different categories of stock mutual funds carry different risks.

» Related: Best performing stocks this month

For example, the performance of large-cap high-growth funds is typically more volatile than, say, stock index funds that seek only to match the returns of a benchmark index like the S&P 500. (Learn more about stock mutual funds versus index funds.)

» Related: 25 best performing high-dividend ETFs

Bond mutual funds = lower returns (but lower risk)

Bond mutual funds, as the name suggests, invests in a range of bonds and provide a more stable rate of return than stock funds. As a result, potential average returns are lower.

Bond investors buy government and corporate debt for a set repayment period and interest rate. While no one can predict future stock market returns, bonds are considered a safer investment as governments and companies typically pay back their debt (unless either goes bust).

Money market mutual funds = lowest returns, lowest risk

These are fixed-income mutual funds that invest in top-quality, short-term debt. They are considered one of the safest investments you can make. Money market funds are used by investors who want to protect their retirement savings but still earn some interest — often between 1% and 3% a year. (Learn more about money market funds.)

Mutual fund fees

Even if you find a low-cost mutual fund, you'll still have to pay some fees. Here are some to look out for:

  • Management fees: Also known as "expense ratios," these cover the cost to pay fund managers and investment advisors.

  • 12b-1 fees: Capped at 1%, these fees pay for the cost of marketing and selling the fund and other shareholder services.

  • Other expenses: These may include custodial, legal, accounting, transfer agent expenses and other administrative costs.

The total annual fund operating expenses are expressed as a percentage of the fund's net average assets.

» How do fees impact returns? This mutual fund calculator can help

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7 Best-Performing Mutual Funds for February 2024 - NerdWallet (4)

Can you lose money in mutual funds?

Yes, as with all investments, it is possible to lose money in mutual funds. But if you invest in well-diversified mutual funds with a long investment timeframe, you'll likely benefit from compound interest and grow your money over time.

Mutual funds: The bottom line

Chasing past performance may be a natural instinct, but it often isn't the right one when placing bets on your financial future. Mutual funds are the cornerstone of buy-and-hold and other retirement investment strategies.

Likewise, chasing one-year returns is not a wise investment strategy. It's a good rule of thumb to look for consistency of returns on a longer time horizon. It would be wise to look at the three, five, and 10 year returns to get a sense of a longer track record.

Hopping from stock to stock based on performance is a rear-view-mirror tactic that rarely leads to big profits. That's especially true with mutual funds, where each transaction may bring costs that erode any long-term gains.

What's important to consider is the role any mutual fund you buy will play in your total portfolio. Mutual funds are inherently diversified, as they invest in a collection of companies (rather than buying stock in just one). That diversity helps spread your risk.

You can create a smart, diversified portfolio with just a few well-chosen mutual funds or exchange-traded funds, plus annual check-ins to fine-tune your investment mix.

Frequently asked questions

Will I owe on taxes on mutual funds I own?

Not if you hold them in a tax-advantaged account like a 401(k). Otherwise, selling a mutual fund, or receiving a distribution from one, may generate tax liability. For more information, check out our article about taxes on mutual funds.

What's the difference between mutual funds and ETFs?

One difference is that mutual funds only change price once a day, while exchange-traded funds (ETFs) trade throughout the day like stocks. You can learn more about the differences between ETFs and mutual funds here.

Neither the author nor editor held positions in the aforementioned investments at the time of publication.

About Me

I am an expert in various topics, including finance and investing. I have a deep understanding of mutual funds, investment strategies, and financial planning. My knowledge is based on a wide range of reputable sources, including financial publications, investment firms, and academic research. I stay updated with the latest trends and developments in the financial industry to provide accurate and relevant information to users.

Mutual Funds

What is a mutual fund? A mutual fund is a company that combines investors' money to purchase investments, creating a more diversified portfolio than most investors can achieve on their own. This category includes index funds, exchange-traded funds, bond funds, and target-date funds. Investors don't personally own the stock or other investments held by the fund, but they share equally in the profits or losses of the fund’s total holdings [[1]].

Types of Mutual Funds

  • Stock Mutual Funds: Also known as equity mutual funds, these carry the highest potential rewards but also higher inherent risks. Different categories of stock mutual funds carry different risks, and the performance of large-cap high-growth funds is typically more volatile than stock index funds that seek only to match the returns of a benchmark index like the S&P 500 [[2]].
  • Bond Mutual Funds: These invest in a range of bonds and provide a more stable rate of return than stock funds. Potential average returns are lower, making them a safer investment option [[3]].
  • Money Market Mutual Funds: These are fixed-income mutual funds that invest in top-quality, short-term debt, considered one of the safest investments with low returns and low risk [[4]].

Choosing the Best Mutual Funds NerdWallet recommends investing primarily through mutual funds, especially index funds, which passively track a market index such as the S&P 500. When choosing mutual funds, it's important to decide whether to invest in active or passive funds, understand and scrutinize fees, and build and manage your portfolio by checking in on and rebalancing your mix of assets once a year [[5]].

Mutual Fund Fees Even low-cost mutual funds have fees, including management fees (expense ratios), 12b-1 fees, and other expenses. These fees are expressed as a percentage of the fund's net average assets [[6]].

Returns and Risks It is difficult for actively managed investments, particularly those with higher fees, to consistently beat the index. Most investors would be better served with a passive investment strategy. Depending on risk tolerance, exploring bond ETFs may be beneficial, but it's essential to do thorough research to determine the best investments for a portfolio [[7]].

Losing Money in Mutual Funds As with all investments, it is possible to lose money in mutual funds. However, investing in well-diversified mutual funds with a long investment timeframe can benefit from compound interest and grow money over time [[8]].

Investment Strategy Chasing past performance or one-year returns is not a wise investment strategy. It's important to look for consistency of returns on a longer time horizon, such as three, five, and 10-year returns, to get a sense of a longer track record. Creating a smart, diversified portfolio with well-chosen mutual funds or exchange-traded funds, plus annual check-ins to fine-tune the investment mix, is recommended [[9]].

Tax Implications and FAQs Holding mutual funds in a tax-advantaged account like a 401(k) can help avoid taxes. Selling a mutual fund or receiving a distribution from one may generate tax liability. Additionally, the differences between mutual funds and ETFs, including their pricing and trading frequency, are important to consider [[10]].

7 Best-Performing Mutual Funds for February 2024 - NerdWallet (2024)
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