Mutual Funds Performance: Why 79% of Funds Lag Behind the Market

Thinking about investing but don’t want to spend all day researching stocks? Mutual funds seem like the easy answer — but here’s what you actually need to know before putting your money in.

The Reality Check on Mutual Fund Returns

Let’s cut through the noise. The S&P 500 has historically delivered 10.70% annual returns over 65 years. That’s your benchmark. Now here’s the uncomfortable truth: roughly 79% of mutual funds couldn’t beat that number in 2021, and the gap has only widened — 86% underperformed over the past decade.

Why does this matter? Because you’re paying fees to professional managers, yet most of them aren’t delivering better results than just buying an index fund.

Understanding Different Mutual Fund Types

Not all mutual funds chase the same goals. Some focus on preserving capital, others swing for the fences with high-risk strategies:

• Stock funds — Typically chase market-beating returns
• Bond funds — Lower risk, more stable income
• Money market funds — Ultra-conservative, minimal volatility
• Target date funds — Auto-adjusts risk as you approach retirement
• Sector-specific funds — Bet heavy on industries like energy or tech

The performance gap between these categories is massive. Take 2022: energy-focused funds crushed it while diversified funds struggled.

The 10-Year and 20-Year Performance Picture

Over the last decade, top-performing large-cap stock mutual funds hit 17% annual returns — well ahead of the 14.70% average during this bull market. Shelton Capital Nasdaq-100 Index Direct and Fidelity Growth Company funds returned 13.16% and 12.86% respectively.

Zoom out to 20 years, and the story shifts. High-performing large-cap mutual funds generated 12.86% annual returns, while the S&P 500 posted 8.13% since 2002. That’s impressive on paper — but remember, most funds underperformed, not outperformed.

What Costs You Should Actually Care About

Here’s what brokers don’t always make obvious: mutual funds charge an expense ratio. You pay this fee annually, whether the fund makes or loses money. Over decades, these fees compound and eat into your returns.

You also give up shareholder voting rights on underlying holdings. It’s a tradeoff for professional management — except that professional management often doesn’t deliver.

Mutual Funds vs. Your Other Options

Mutual Funds vs. ETFs

Exchange-traded funds trade like stocks on open markets, meaning you can buy and sell them instantly (ETFs have intraday liquidity, mutual funds typically don’t). ETFs also tend to charge lower fees and offer short-selling capability. The verdict? ETFs win on flexibility and costs.

Mutual Funds vs. Hedge Funds

Hedge funds only accept accredited investors and play with volatile derivatives and short positions. Translation: higher risk, higher barrier to entry. Most people investing long-term should skip hedge funds entirely.

Is a Mutual Fund Right for You?

Mutual funds can work if you:

• Want hands-off diversified exposure to markets
• Can’t or won’t research individual stocks
• Have a long time horizon (10+ years)
• Accept that most funds won’t beat the benchmark

Before jumping in, honestly assess your risk tolerance, investment timeline, and fee tolerance. More than 7,000 active mutual funds operated in the U.S. in 2021 — but the proliferation of options doesn’t mean better odds for most investors.

The key insight? A consistent fund that tracks its benchmark reliably might serve you better than chasing top performers. Because past performance, as they say, doesn’t guarantee future results.

Data reflects conditions as of mid-2022 and is subject to change. Always consult a financial advisor before making investment decisions.