Most experts consider growth stock mutual funds to be excellent long-term investments, particularly when held for 5 years or longer due to market volatility. The average return on a growth stock mutual fund is difficult to determine, as many variables are present. Every fund is different, and each fund contains different stocks and is managed by different people. By making good choices in funds, you can maximize returns and minimize your risk.
The Social Security Administration uses an average return of 7 percent when projecting alternatives to Social Security in private investing. Many experts project that between 8 and 10 percent average growth is normal and attainable. According to Kiplinger magazine, three growth stock mutual funds that stand out with good returns over the last 10 years are Fidelity Contrafund, Fidelity Low-Price Stock Fund and T-Rowe Price Small Cap Value. These have averaged 7.9, 9.3 and 9.3 percent respectively.
Expenses reduce the return on investment of any mutual fund. Mutual fund expenses include the managers of the funds, as well as trading expenses for the stocks in the fund. Mutual funds also pass along expenses related to sales and marketing. According to Money Magazine, the average expense ratio for growth stock mutual funds is 1.2 percent per year. However, the managed funds in the Money Magazine 70, a list of top funds chosen by Money Magazine, is just 0.70 percent.
Some growth stock mutual funds charge a percentage of your investment, also known as a load. A front-loaded fund reduces the amount of your investment by the load. If you invest $10,000 in a fund with a 5 percent load, only $9,500 is invested in the fund, while $500 pays for the broker's commission. Some funds have a back-load, also called a redemption charge. Some funds lower their redemption charges the longer you own the mutual fund.
Mutual fund returns are stated on an annual basis. If your mutual fund has a 10 percent growth rate, and you invest $10,000 in the fund, after one year, the fund would be worth $11,000 before expenses. If the expense ratio was 1 percent, the value would be reduced by $110, leaving a total of $10,890. By applying the same numbers to year two, the gain would be $1089, with expenses of $120, for a balance of $11,859. Year three would leave a balance of $12,914; year four would be $14,064. The final year, the fund would gain $1406, and pay expenses of $141, leaving a balance of $13,923. Including expenses, you would have earned $3,923 on the original investment.
With a non-retirement account, your mutual fund growth is subject to federal income taxes, and state taxes if they apply. This can reduce your real rate of return significantly, depending on your marginal tax bracket. You can defer the taxes until retirement by investing in growth-stock mutual funds through a traditional IRA, and possibly even claim a tax deduction for your investment. If you qualify, based on your income, you can make the gains tax-free when withdrawn at retirement by investing with a Roth IRA.
Review the mutual funds prospectus and investing information before you decide to invest in a fund. The prospectus should give you the average return over various time periods, including since the fund was established. A higher long-term return is more desirable. Also, check to see what the fund manager's experience is, as well as what type of growth stocks the fund invests in, to be certain that the mutual fund's investment philosophy is in line with your own.
Video of the Day
- Kiplinger: The 2012 Kiplinger 25 -- The Best No-Load Mutual Funds to Meet Your Goals
- CNN Money: Money 70 -- Best mutual funds and ETFs
- Social Security Administration: What Stock Market Returns to Expect for the Future?
- Internal Revenue Service: Publication 590 -- Individual Retirement Arrangements (IRAs)
- Securities and Exchange Commission: Invest Wisely -- An Introduction to Mutual Funds