3 min •
Daniel Mitrovsky
Mutual Funds: What is a Mutual Fund, Types, and Performance
Mutual funds are among the most popular investment tools that offer an easy way to grow your finances. Whether you’re a beginner or an experienced investor, mutual funds allow you to diversify your portfolio and provide professional management of your capital. But what exactly should you invest in? To find out which options are best for you, read our article on What to Invest in.
In this article, we’ll take a closer look at:
- What are mutual funds and what are the benefits of mutual funds?
- How mutual funds work and who manages them
- What are the types of mutual funds
- Investing in mutual funds
- Average performance and risks of mutual funds
- What to consider when investing in mutual funds?
- Mutual funds and taxes
- Cryptocurrency funds as a suitable alternative
What are mutual funds and what are the benefits of mutual funds?
A mutual fund is a financial tool that gathers funds from multiple investors to create a diversified portfolio consisting of stocks, bonds, or other securities depending on the fund’s specific investment strategy.
It provides individual investors with access to professional portfolio management, potential cost savings, and risk distribution across multiple assets.
Benefits of investing in mutual funds:
- Professional Portfolio Management: Experts manage your investments for a low fee.
- Dividend Reinvestment: Automatic use of profits to purchase additional shares increases the value of your investment.
- Risk Reduction: Diversification across dozens to hundreds of securities reduces the risk of loss.
- Simplicity and Fair Valuation: Easy access, low minimum investments, and trading at fair prices once a day.
How mutual funds work and who manages them
Before investing in mutual funds, it’s important to understand the basic principles of how these funds work and why they may be a good investment.
Pooling of Funds
Mutual funds gather money from multiple investors and create a collective investment fund. Each investor owns shares, and the total value of the fund is determined by the net asset value (NAV).
Professional Management
Experienced portfolio managers handle mutual funds and make investment decisions aimed at achieving the fund’s objectives. Their goal is to maximize returns while managing risk through strategic asset allocation and security selection.
Diversification
Mutual funds invest in a diversified portfolio of securities, such as stocks, bonds, or a combination of both. Diversification helps spread risk across multiple assets, reducing the impact of poor performance from a single investment.
Investor Shares
When investing in a mutual fund, an investor buys shares proportional to their investment amount. The number of shares an investor owns represents their ownership stake in the overall fund.
Net Asset Value (NAV)
NAV is the market value of a mutual fund share and is calculated by dividing the total value of all assets in the fund’s portfolio by the number of outstanding shares. Investors buy or sell mutual fund shares at the NAV price.
Liquidity
Mutual funds provide liquidity as investors can buy or sell shares on any business day at the closing NAV. This flexibility allows investors to easily enter or exit their positions.
Returns and Distributions
Mutual funds generate returns through capital appreciation, interest, and dividends from underlying securities. Profits are distributed to investors either as cash or additional shares. Investors may also receive regular income distributions.
What are the types of mutual funds
The basic division of mutual funds is into actively managed funds and index funds.
- Actively managed funds are funds where portfolio managers actively select investments with the goal of outperforming a specific benchmark index.
- Index funds aim to replicate a specific index as accurately as possible by mirroring its composition and performance.
These funds can then be further divided by investment strategy, including:
- Equity funds – Primarily invest in stocks. They may focus on company size (small, mid, large), investment styles (growth, value, blend), or geographical areas (domestic or international stocks).
- Bond funds – Focus on fixed-income securities such as government or corporate bonds. They can be conservative or actively managed, with returns and risks depending on the type of bonds.
- Index funds – Replicate the performance of a specific index, such as the S&P 500. Passive management leads to lower fees and often higher performance than actively managed funds.
- Balanced funds – Combine stocks, bonds, and other assets. The goal is diversification and risk reduction. The portfolio manager can adjust the allocation of assets depending on the market.
- Money market funds – Invest in short-term, low-risk instruments such as government treasury bills. They offer low returns but high safety.
- Income funds – Provide regular income by investing in high-quality bonds held to maturity. They are suitable for retirement investing.
- International funds – Invest outside the investor’s country, which can improve diversification and offer returns independent of the domestic market.
- Regional funds – Focus on specific geographical regions (e.g., Europe, Latin America). They offer an opportunity to benefit from growth in a specific region but may be impacted by regional risks.
- Sector and thematic funds – Invest in specific sectors (e.g., technology) or themes (e.g., artificial intelligence). They are volatile since entire sectors can rise or fall together.
- Socially responsible funds – Invest in companies that meet ethical criteria or focus on sustainable technologies and ESG factors (environmental, social, and governance).
Investing in mutual funds
Investing in mutual funds can be a simple but strategic process if you approach it correctly. Here is a brief overview of what the decision-making process might look like:
- Define your goals: Determine your investment goals, such as building wealth, retirement, education funding, and also define your risk tolerance.
- Explore different types of funds: Research mutual fund categories, such as equity funds, bond funds, balanced funds, or index funds, that align with your goals and risk profile.
- Examine the performance of individual funds: Analyze historical returns, fees, the fund manager’s performance, and consistency of returns.
- Choose the right platform: Select a trustworthy broker or intermediary offering mutual fund investments.
- Start slow: Begin with a dollar-cost averaging strategy to invest fixed amounts regularly and minimize risk.
- Diversify: Spread your investments across multiple funds or assets to reduce risk.
- Review regularly: Monitor the performance of your funds regularly and adjust your portfolio as needed to align with your goals.
Average performance and risks of mutual funds
It is challenging to determine the average performance of a mutual fund, as there are several types of funds, each with different subcategories, and each mutual fund has different risks, which results in varying performance. Let’s take a look at the most popular types of mutual funds: equity funds, bond funds, and balanced funds.
We’ll look at mutual funds that manage assets worth over $500 million and have received the highest ratings in MorningStar evaluations.
| Equity funds | 1 Y | 3 Y | 5 Y | Average return since inception |
| GQG Partners US Select Quality Equity Fund Institutional Shares (GQEIX) | 29,37% | 14,04% | 17,10% | 16,29% |
| Marshfield Concentrated Opportunity Fund (MRFOX) | 17,13% | 13,14% | 14,47% | 16,28% |
| GQG Partners US Select Quality Equity Fund Investor Shares (GQEPX) | 29,16% | 13,81% | 16,92% | 16,12% |
| Putnam Core Equity Fund Class A (PMYAX) | 26,15% | 10,57% | 15,65% | 15,24% |
| Principal Capital Appreciation Fund Institutional Class (PWCIX) | 26,22% | 9,91% | 15,08% | 12,98% |
| Principal Capital Appreciation Fund Class A (CMNWX) | 25,86% | 9,58% | 14,72% | 12,71% |
| JPMorgan U.S. Large Cap Core Plus Fund Class I Shares (JLPSX) | 28,93% | 10,91% | 17,33% | 12,40% |
| JPMorgan U.S. Large Cap Core Plus Fund Class A Shares (JLCAX) | 28,64% | 10,64% | 17,04% | 12,12% |
| Pioneer Fund Class Y (PYODX) | 22,91% | 8,62% | 15,36% | 12,07% |
| Natixis Funds Trust I U.S. Equity Opportunities Fund Class Y (NESYX) | 25,54% | 10,88% | 15,54% | 12,00% |
| Total | 259,91% | 112,10% | 159,21% |
The performance of the 10 equity mutual funds we described in the “What are the types of mutual funds” section shows a combined return of 159% over 5 years. If you had a portfolio made up of these mutual funds, your performance would be approximately 31% annually. On average, each fund individually achieved a performance of 16% over 5 years and 13.8% since the fund’s inception.
| Bond funds | 1 Y | 3 Y | 5 Y | Average return since inception |
| Fidelity Capital & Income Fund (FAGIX) | 10,68% | 3,84% | 6,62% | 9,38% |
| BrandywineGLOBAL – High Yield Fund Class A (BGHAX) | 9,55% | 4,29% | 6,22% | 7,85% |
| BrandywineGLOBAL – High Yield Fund Class I (BGHIX) | 9,70% | 4,57% | 6,49% | 7,39% |
| Lord Abbett Short Duration High Yield Fund Class A (LSYAX) | 9,15% | 4,84% | – | 7,23% |
| Buffalo High Yield Fund Institutional Class (BUIHX) | 9,89% | 5,15% | 6,10% | 6,84% |
| Buffalo High Yield Fund (BUFHX) | 9,72% | 5,00% | 5,95% | 6,81% |
| BrandywineGLOBAL – Corporate Credit Fund Class I (BCGIX) | 9,11% | 4,28% | 5,35% | 6,79% |
| BrandywineGLOBAL – Corporate Credit Fund Class A (BCAAX) | 8,86% | 4,02% | 5,08% | 6,50% |
| Osterweis Strategic Income Fund (OSTIX) | 8,03% | 4,50% | 5,58% | 6,20% |
| American Beacon SiM High Yield Opportunities Fund Investor Class (SHYPX) | 9,57% | 4,48% | 5,55% | 6,11% |
| Total | 94,26% | 44,97% | 52,94% |
Bond funds, which are considered a more conservative form of investment, have achieved a combined return of 53% over 5 years, which represents an average portfolio appreciation of 10% if you belong to investors who prefer low risk. The average return for individual mutual funds is approximately 7% since their inception.
| Zmiešané fondy | 1 Y | 3 Y | 5 Y | Since the fund’s inception |
| Fidelity Puritan Fund (FPURX) | 19% | 6% | 11% | 11% |
| Fidelity Balanced Fund (FBALX) | 16% | 5% | 11% | 10% |
| Eaton Vance Balanced Fund Class I (EIIFX) | 20% | 6% | 9% | 9% |
| George Putnam Balanced Fund Class A (PGEOX) | 17% | 6% | 9% | 9% |
| 1919 Socially Responsive Balanced Fund Class I (LMRNX) | 16% | 4% | 10% | 8% |
| Calvert Balanced Fund Class I (CBAIX) | 19% | 6% | 9% | 8% |
| Fidelity Multi-Asset Income Fund (FMSDX) | 10% | 2% | 8% | 8% |
| Calvert Balanced Fund Class A (CSIFX) | 19% | 5% | 9% | 8% |
| Touchstone Balanced Fund Class Y (SIBLX) | 13% | 4% | 9% | 8% |
| Touchstone Balanced Fund Class A (SEBLX) | 13% | 4% | 9% | 8% |
| Total | 162% | 47% | 94% |
Mixed funds have proven their purpose as being something in between bond and equity mutual funds. Their combined performance over 5 years is 94%, which is approximately 19% per year. The return of individual funds since inception has averaged around 9%.
What to consider when investing in mutual funds?
Investing in mutual funds always comes with a certain level of risk. Before deciding to invest, consider the following risk factors:
No Guarantee of Returns
Mutual funds do not guarantee returns, capital appreciation, or investment growth. It’s important to recognize that results could be lower than expected.
Market Risk
Every investment in securities carries market risk, with mutual funds being impacted by various factors such as global, regional, or national economic events, government policies, political instability, legislative and regulatory changes, interest rate movements, overall investor sentiment, and other unexpected events like natural disasters or wars.
Liquidity Risk
Liquidity refers to the ability to sell a security at its fair price. If a given security is traded in low volumes, its sale might be harder and less advantageous.
Inflation Risk
Inflation can erode the purchasing power of your investment, meaning the real value of returns decreases as prices rise.
Risk Associated with Fund Managers
The performance of a fund depends on the experience, expertise, and investment strategies of the manager. If the manager lacks sufficient knowledge or selects incorrect strategies, it may negatively impact the fund’s performance, harming the interests of investors.
Mutual funds and taxes
It’s important to determine in which country the mutual fund is registered, as this affects how it is taxed. If the fund is registered in Slovakia, the management company will automatically deduct the tax, and the investor doesn’t need to take any further steps.
However, most mutual funds are registered abroad, typically in Luxembourg or Ireland. For such funds, the investor must file a tax return and pay a 19% tax on the returns. Information about the fund’s registration can be found in its documentation on the management company’s website.
Cryptocurrency funds as a suitable alternative
Cryptocurrencies are becoming an increasingly popular investment option that offers a new way to diversify your portfolio. Unlike traditional mutual funds that manage stocks, bonds, or other assets, cryptocurrencies bring new technologies with high growth potential.
Unlike mutual funds, investing in cryptocurrencies does not need to go through intermediaries. Modern platforms like Fumbi offer secure and user-friendly solutions for anyone who wants to start investing in digital assets.
Fumbi offers an interesting alternative to mutual funds – Fumbi Index Portfolio. This product works similarly to index mutual funds. It includes more than 20 of the most prominent cryptocurrencies on the market, which together make up more than 80% of the total market capitalization of cryptocurrencies.
With Fumbi Index Portfolio, you have the opportunity to profit from the overall growth of the cryptocurrency market, while the unique Fumbi Algorithm automatically optimizes the portfolio on a daily basis. This minimizes the risks associated with individual cryptocurrencies while maximizing the appreciation of your investment. This product alone outperformed the performance of equity mutual funds we mentioned in the section “Average performance and risks of mutual funds” with a performance of 102% for 2024.
However, if you’re looking for a more conservative approach, Fumbi offers the Bitcoin and Gold product, which combines the digital innovation of Bitcoin with the traditional stability of gold. This product is ideal for those who want to leverage Bitcoin’s growth potential while hedging against market volatility through an investment in a proven store of value – gold. This product also outperformed its class in terms of risk tolerance, with a performance of 87% for 2024.
Cryptocurrencies can be a great alternative to mutual funds, especially for investors looking to gain access to more modern investment tools, diversify their portfolios, and capitalize on the potential of the rapidly growing digital asset market. Furthermore, investments through platforms like Fumbi take place in a regulated and secure environment, with all cryptocurrencies being directly owned by you and maximally protected through technologies like Fireblocks.
If you’re excited to explore the world of cryptocurrencies and take advantage of their unique opportunities, see how you can start investing in cryptocurrencies today!
TAKE ADVANTAGE OF CRYPTO’S POTENTIAL
Daniel Mitrovsky 
Autor
