It is natural for us to want to know which mutual funds are performing the best today when we shop for them.

When looking for the best mutual funds for 2021, that’s commonplace to start, but don’t forget you’re shopping for tomorrow. Long-term winners aren’t always top performers in the short term. There may be mutual funds that are better for your portfolio than for your parents, your siblings, or your neighbors.

Best mutual funds for 2021

Best mutual funds for 2021

Using data from Morningstar (a NerdWallet advertising partner), we evaluated major U.S. equity funds open to new investors with low costs (no sales commissions, and expense ratios of 1% or less) and minimum investment requirements of $2,500 or less.

This section explains how to choose a mutual fund.

FundSymbol3-year returnExpense ratio
Fidelity Advisor Series Growth Opportunities FundFAOFX35.02%0.01%
Fidelity Advisor Growth Opps ZFZAHX34.67%0.69%
Fidelity Advisor Growth Opps IFAGCX34.51%0.81%
Fidelity Series Growth CompanyFCGSX31.19%0.00%
Fidelity Series Blue Chip GrowthFSBDX30.45%0.00%
American Century Focused Dynamic Gr InvACFOX30.08%0.85%
Fidelity Growth Company KFGCKX29.95%0.75%
Fidelity Growth CompanyFDGRX29.84%0.83%
Touchstone Sands Capital Select Growth YCFSIX29.71%0.94%
Fidelity Blue Chip Growth KFBGKX29.24%0.71%
Fidelity Blue Chip GrowthFBGRX29.13%0.79%
T. Rowe Price New HorizonsPRNHX28.71%0.75%
Columbia Small Cap Growth Inst2CSCRX28.50%0.94%
Lord Abbett Growth Leaders R6LGLVX27.93%0.59%
Lord Abbett Growth Leaders FLGLFX27.85%0.65%

Data current as of October 6, 2021.

How to choose the best mutual funds

How to choose the best mutual funds

As a general rule, NerdWallet recommends investing primarily in mutual funds, especially index funds, which passively track market indices such as the S&P 500. Actively managed mutual funds strive to outperform stock market performance, which is a strategy that often fails.

Here are some things to consider when investing in funds:

  • Invest in active or passive funds, keeping in mind that both performance and costs may favor passive investing.
  • Examine and understand fees. Savings can be achieved through mutual funds that don’t charge transaction fees.
  • You should rebalance your mix of assets once a year while managing your portfolio.

Average mutual fund return

Average mutual fund return

Different types of mutual funds should bring different expectations of returns, so managing your portfolio means managing your expectations as well.

Stock mutual funds = higher potential returns (or losses)

Stock mutual funds, also known as equity mutual funds, provide the highest potential profits, but also carry the highest risks – and different categories of stock mutual funds come with varying levels of risk.

Stock index funds are typically less volatile than large-cap high-growth funds, for example, which aim to match the returns of an index such as the S&P 500.

Bond mutual funds = lower returns (but lower risk)

Mutual funds that invest in bonds, as their name suggests, have a more stable return rate than stock funds. Therefore, they have lower potential returns.

Governments and corporations issue bonds that have a set repayment period and interest rate. Bonds are considered a safer investment than stock market returns, because governments and companies usually pay back their debts (unless either goes bankrupt).

Money market mutual funds = lowest returns, lowest risk

Mutual funds that invest in top-quality, short-term debt. The best investments are those that invest in short-term, high-quality debt. In money market funds, investors may earn between 1% and 3% interest per year while protecting their retirement savings.

Focus on what matters

 

It might be natural to chase past performance, but it isn’t always a good strategy when predicting your financial future. The cornerstone of buy-and-hold investing and other retirement strategies is mutual funds. Making big profits by jumping from stock to stock based on performance is a rear-view-mirror tactic that rarely works. This is especially true with mutual funds, where each transaction may incur costs that can negate any long-term gains.

The role any mutual fund you buy will play in your overall portfolio is critical to consider. Because they invest in a variety of companies (rather than just one), mutual funds are inherently diversified. Diversification spreads your risk.

By picking a few well-chosen mutual funds or exchange-traded funds, plus re-evaluating your investment mix every year, you can build a smart, diversified portfolio.

Disclosure: At the time of publication, the author held no positions in the aforementioned securities.