Suppose you invest $100,000 in a mutual fund. You're only human to wonder how the fund will perform, and what your investment will be worth in one or five or 10 years. As with any financial investment, there's no way to predict the future value with any certainty. Mutual funds can skyrocket, and your investment will be worth millions. They can also crash and burn, and your investment will be worth bupkis...or pretty close to it. For most mutual funds, performance falls well within these two extremes.
Mutual funds are investment vehicles that represent a market basket of securities. A company that offers mutual funds collects investment money from many investors and uses the funds to buy a collection of stocks or other securities. For example, a mutual fund can consist of all 30 stocks in the Dow Jones Industrial Average, so that the value of the fund tracks changes in the value of the Dow. Other mutual funds can concentrate on investments in a particular segment, like technology, an area of the world, such as China, or many other themes. Mutual funds are a tool to help investors diversify their investments.
In principle, there is no limit to the amount of money one could earn through investments in mutual funds. As long as the underlying securities that make up a fund continue to rise in value, the mutual fund will continue to rise as well. Very few funds produce astronomical returns, however, and there is no way of predicting how a particular fund will perform. Of course, a mutual fund can produce negative returns -- that is, the value of the fund can fall just as readily as it can rise.
In practice, the best-performing mutual funds tend to return about 30 percent a year, meaning an investment of $1,000 would be worth $1,300 after a year, before any fees are subtracted. On rare occasions, a fund might return 100 percent or more in a single year. In 2010, there were no mutual funds with returns greater than 89 percent.
A fund that increases in one year may decrease the next. Investors often use the five-year fund performance figure as an indicator of performance over the longer term. The best performing mutual funds typically have five-year investment returns of about 15 to 20 percent a year. Occasionally, a fund's five-year performance may top annualized returns of 30 percent.
Many brokerages and online financial services offer mutual fund screeners that list funds according to criteria you select. For example, you can create a list of all mutual funds that have 1-year returns greater than 20 percent, or three-year returns greater than 10 percent. You can use the screeners to select other criteria, such as the amount of fees the fund charges or the overall size of the fund.
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