Best Mutual Fund Companies: Where To Invest?

Mutual funds are a popular investment tool for both individual and professional investors. They are a type of investment product where the funds of many investors are pooled into a single product, which is then used to invest in a group of assets. There are over 9,000 mutual funds, holding more than $16 trillion in assets.

When choosing a mutual fund to invest in, there are several factors to consider. Firstly, you should identify your investment goals and risk tolerance. Are you investing for long-term capital gains or do you need current income? Can you accept dramatic swings in portfolio value, or do you require a more conservative investment?

You should also consider the different types of mutual funds available, such as bond funds, equity funds, target-date funds, and money market funds, and choose the one that best aligns with your goals and risk tolerance. Additionally, it is important to research the fund's past performance, fees, and investment strategy.

Some of the best companies to invest in mutual funds include Fidelity, Vanguard, Schwab, and T. Rowe Price, among others. These companies offer a range of low-cost mutual funds with strong historical performance.

How to choose a good mutual fund

There are thousands of mutual funds to choose from, but not all of them will be a good fit. Here are some tips to help you select the best mutual funds for your needs:

Identify your goals and risk tolerance:

Ask yourself if you want your money to grow steadily over time with low risk, or if you're seeking the highest potential returns. Consider if you're willing to tolerate large swings in your portfolio's value for the chance of greater long-term returns. Also, determine your time horizon—how long you plan to hold the investment.

Understand the management style:

Mutual funds can be actively or passively managed. Actively managed funds have portfolio managers who actively buy and sell securities, often with the goal of beating a benchmark index. These funds tend to have higher fees. Passively managed funds, or index funds, aim to track and duplicate the performance of a benchmark index and generally have lower fees.

Know the different types of funds:

Familiarise yourself with the different types of mutual funds, such as large-cap, small-cap, value, and growth funds. Large-cap funds invest in large, widely held companies, while small-cap funds focus on smaller companies. Value funds invest in stocks that are perceived to be undervalued, and growth funds focus on rapidly growing companies.

Be mindful of fees:

Fees can significantly impact your investment returns. Look out for front-end and back-end load fees, as well as expense ratios, which are charged annually as a percentage of assets under management. No-load funds don't charge load fees, but they may have higher management expense ratios.

Do your research:

Evaluate the fund's management team, past performance, and turnover rate. A strong management team with a history of success is important. High levels of turnover can create taxable events, which can hurt returns for taxable accounts.

Diversify your portfolio:

Invest in a variety of assets, such as international funds, bonds, real estate, and fixed-income funds, to create a well-rounded portfolio with lower volatility.

Focus on long-term growth:

Remember that past performance does not guarantee future results. Conduct thorough research, consider meeting with a financial advisor, and stay focused on your portfolio's long-term growth potential.

Mutual fund fees

Annual Fund Operating Expenses

These are ongoing fees that cover the cost of paying fund managers, accountants, legal fees, marketing, etc. They are typically between 0.25% and 1% of your investment in the fund per year. These fees are also known as mutual fund expense ratios or advisory fees.

They can include:

• Management fees: The cost to pay fund managers and investment advisors.
• 12b-1 fees: Fees capped at 1% that cover the cost of marketing and selling the fund, as well as shareholder services.
• Other expenses: These may include custodial, legal, accounting, transfer agent expenses, and other administrative costs.

Shareholder Fees

These are sales commissions and other one-time costs incurred when buying or selling mutual fund shares.

They can include:

• Sales loads: Commissions paid when buying or selling mutual fund shares, also known as front-end or back-end loads.
• Redemption fee: Charged when you sell shares within a short period of buying them.
• Exchange fee: Charged by some funds when shareholders transfer their shares to another fund within the same fund group.
• Account fee: Charged for maintaining your account, often when your balance falls below a specified minimum.
• Purchase fee: Charged when you purchase shares (different from a front-end sales load, which is paid to the broker).

It's important to note that even if a mutual fund doesn't charge sales loads, it may still charge redemption, exchange, account, and purchase fees.

Additionally, mutual funds may also charge expense ratios, 12b-1 fees, and transaction fees.

When considering investing in mutual funds, it is crucial to understand the various fees involved, as they can significantly impact your long-term returns. Even small differences in fees can lead to substantial differences in investment returns over time. Therefore, it is essential to carefully review the fund's prospectus and fee table to make informed investment decisions.

Actively vs passively managed funds

When it comes to investing in mutual funds, there are two main approaches: actively managed funds and passively managed funds. Both have their own advantages and disadvantages, and it's important to understand the differences before deciding which type of fund to invest in.

Actively managed funds involve fund managers who actively buy and sell securities based on their expectations for how those securities will perform. These fund managers typically have a team of analysts and experts who help identify investment opportunities and make buy and sell decisions. Active fund managers aim to beat the stock market's average returns and take advantage of short-term price fluctuations. This approach requires a deeper analysis and expertise to know when to pivot into or out of a particular stock, bond, or asset. Active investing is more hands-on and involves more frequent buying and selling of investments. The expense ratios of actively managed funds tend to be higher compared to passively managed funds due to the ongoing analysis and portfolio management required.

On the other hand, passively managed funds, also known as index funds, are designed to mirror the performance of a specific index, such as the S&P 500. These funds hold the same or similar securities in the same proportions as the index they are tracking. The managers of passively managed funds only buy or sell securities to correspond with the index, resulting in less frequent buying and selling. This approach is simpler and more straightforward, making it a popular choice for investors who want to "buy the market". Passively managed funds have lower expense ratios than actively managed funds since they require less analysis and portfolio management.

According to Morningstar data, the success rate of actively managed funds outperforming their passive peers was around 50% from July 2023 to June 2024. However, in the US large-cap market, only about 20% of actively managed funds survived and beat their average passive rivals over the same period. This suggests that the competitiveness and nature of the US large-cap market pose challenges for active managers.

When deciding between actively and passively managed funds, it's important to consider the benefits and drawbacks of each approach. Actively managed funds offer more flexibility and the potential for higher returns but come with higher fees. On the other hand, passively managed funds have lower fees and are more transparent, but they may be too limited and typically won't beat the market. Ultimately, there is no one-size-fits-all answer, and investors should carefully consider their investment goals, risk tolerance, and preferences before making a decision.

Mutual fund alternatives

Mutual funds are a popular investment tool for individual and professional investors. They are a type of investment fund that pools money from many participants to buy a portfolio of stocks, bonds, and other securities. The fund sells shares to investors, with each share representing an equity ownership stake in the mutual fund and the income it generates.

However, there are several alternative investment options available that can boost returns, generate income, and provide diversification from traditional investments. Here are some alternatives to mutual funds:

Alternative Mutual Funds

Alternative mutual funds, also known as "alt funds" or "liquid alts", are publicly offered, SEC-registered mutual funds that hold non-traditional investments or use complex investment and trading strategies. They often invest in assets such as global real estate, start-up companies, or commodities like gold or oil. These funds may also employ strategies such as short-selling, using derivatives, or following "absolute return" or "market neutral" approaches. While these strategies may result in higher costs and risks, they can offer greater diversification and different returns compared to traditional investments.

Private Assets

Private assets include private equity, private credit, infrastructure, and private real estate. These are more complex and less frequently traded than public stocks and bonds but provide investors with access to additional sources of return.

Hedge Funds

Hedge funds operate mainly in public markets but use less traditional tools such as short-selling and leverage. They are not subject to the same regulatory requirements as mutual funds and are only available to accredited investors or qualified purchasers. Hedge funds typically have higher fees than alternative mutual funds.

Other Alternatives

Other alternative investment options include:

• Long/short strategy funds
• Tactical allocation funds
• Commodities funds
• Equity precious metals funds
• Global allocation funds
• Multi-asset strategies

When considering alternative investments, it is important to understand the unique characteristics, risks, and potential returns associated with each option.

How to invest in mutual funds

Investing in mutual funds can be a great way to access a diversified portfolio of securities for a relatively small minimum investment. Here is a guide on how to invest in mutual funds:

Understanding Mutual Funds

Mutual funds are a pool of money collected from multiple investors, which is then used to invest in securities such as stocks, bonds, or other short-term investments. Each share in the fund represents a proportional interest in the fund's portfolio, meaning that the more shares you own, the larger your interest in the fund. For example, if a fund holds 5% of its portfolio in Apple and 2% in Tesla, your share of the fund will hold the same stocks in the same proportions.

Active vs. Passive Mutual Funds

One of the key distinctions between mutual funds is whether they follow an active or passive investment strategy. Active funds are managed by professionals aiming to outperform a market index, such as the S&P 500. These funds tend to be more expensive due to the higher fees associated with professional management. On the other hand, passive mutual funds are designed to track a specific market index and often have lower fees or no fees at all.

Types of Mutual Funds

There are several types of mutual funds available, including:

• Stock mutual funds: These funds invest in corporate stocks and can focus on dividends, growth, specific industries, sectors, or geographies.
• Bond mutual funds: These funds invest in various forms of debt, ranging from relatively safe government bonds to higher-risk "junk" bonds.
• Money market funds: These funds invest in high-quality, short-term debt and tend to be low-risk with slightly higher returns than savings accounts.
• Index funds: These funds track the performance of an index, such as the S&P 500, and usually have lower costs.

Choosing a Mutual Fund

When choosing a mutual fund, consider the following:

• Investment objectives: Ensure that the fund's investment objectives align with your long-term financial plan.
• Investment approach and philosophy: Understand the fund's overall approach, investing philosophy, and who the portfolio managers are.
• Performance: Evaluate the fund's long-term performance and whether it is likely to continue.
• Fees: Compare the fees associated with different funds, as these can significantly impact your returns.

Buying and Selling Mutual Funds

Mutual funds can be purchased through online brokers or directly from the fund manager. They are priced at the end of each trading day based on their net asset value (NAV) and usually have a minimum investment of a few thousand dollars. When buying or selling mutual funds, you will receive the next available NAV as your price since mutual funds trade only once a day.

Benefits of Mutual Funds

Mutual funds offer several advantages, including:

• Diversification: Mutual funds provide instant diversification, allowing you to invest in a broad range of securities and industries.
• Affordability: Mutual funds typically have low minimum investment requirements and reasonable annual fees.
• Professional management: Mutual funds are managed by professionals who make investment decisions on your behalf.
• Liquidity: Mutual fund shares can be easily redeemed at any time for an amount equal to the current NAV plus any redemption fees.

Things to Watch Out For

When investing in mutual funds, be mindful of the following:

• Fees: Mutual funds can charge various fees, including management fees, 12b-1 fees, redemption fees, exchange fees, and purchase fees. These fees can significantly impact your returns over time.
• Loads: Some funds charge commissions, known as loads, during the purchase or sale of shares. Funds that do not charge these commissions are called no-load funds.
• Taxes: If you own mutual funds in a taxable account, you may owe capital gains tax when you sell the funds. Consider holding funds in tax-advantaged accounts, such as IRAs, to defer or avoid taxes on gains.

Final Thoughts

Mutual funds can be a great way to access a diversified portfolio of investments. Remember to read the fund's prospectus to understand the risks and objectives before investing. Consider investing in index funds to keep costs low and ensure that more of the returns end up in your pocket.

Frequently asked questions