Last year's top fund usually becomes next year's average fund. Studies from Morningstar and others have shown this pattern for decades. So if chasing returns doesn't work, how do you actually find excellent mutual funds?
The answer rarely involves crystal balls or hot tips. It involves a small checklist of traits that great funds share over long stretches of time.
This guide walks through that checklist and names a few well-known options that often check the boxes. Past performance doesn't guarantee future results, so use this as a thinking framework, not a buy list.
Our Top Picks
These commonly available, low-cost funds tend to show up on professional shortlists because they hit most of the traits below. They are not personalized recommendations.
- Brokerage account: Robinhood for easy access to ETFs and index funds with no commissions
- Total market index: Fidelity ZERO Total Market Index Fund (FZROX)
- S&P 500 staple: Vanguard 500 Index Fund Admiral Shares (VFIAX)
- International exposure: Vanguard Total International Stock Index Fund (VTIAX)
- Broad bond fund: Schwab U.S. Aggregate Bond Index Fund (SWAGX)
Each of these has low fees, deep diversification, and a long history that lets you study the strategy.
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The Five Traits of Excellent Mutual Funds
There is no perfect formula, but most well-regarded funds share these five qualities.
Low Expense Ratio
Fees are the only fund variable you can predict with certainty. A 0.05% fund leaves more in your account than a 1.0% fund, year after year.
Most excellent funds keep fees under 0.20%. Index funds often sit between 0.00% and 0.10%.
Broad Diversification
A fund that holds 500 to 3,000 stocks reduces the chance that one bad company sinks your returns. Single-sector and single-country funds can swing harder in either direction.
For most core holdings, broad equals safer over long periods.
A Long Track Record
Funds with 10 or more years of history give you data through bull and bear markets. A 3-year-old fund hasn't been tested by a real downturn.
History doesn't predict the future, but it does reveal how the strategy behaves under stress.
Consistent Strategy
Excellent funds stick to their stated approach. A large-cap value fund that suddenly loads up on speculative tech stocks should worry you, not impress you.
Check the fund prospectus and recent annual report to see if it's still doing what it said it would do.
Tax Efficiency
Funds that trade less generate fewer taxable events. Index funds and ETFs usually win here, especially in taxable accounts.
In a tax-sheltered account like a 401(k) or IRA, tax efficiency matters less because the account itself shelters gains.
How to Compare Two Funds Side by Side
Use a free tool from any broker or Morningstar. Type in two tickers and look at expense ratio, 10-year return, holdings count, and turnover ratio.
A fund with 800 holdings and a 4% turnover ratio is very different from one with 40 holdings and 80% turnover. Both can be excellent, but they fit different roles in a portfolio.
If one fund costs 0.05% and the other 0.85% with similar long-term returns, the cheap one usually wins.
Where to Actually Buy These Funds
Most employer 401(k) plans offer 10 to 30 fund choices. Outside of that, you need a brokerage account.
Many investors use modern apps for the simple interface. Our Robinhood review goes into detail on what the platform supports for ETF and fund investing.
Look for a broker that offers commission-free trades on most ETFs and a no-transaction-fee list for traditional mutual funds. Both can save real money over time.
Active Funds That Still Earn Their Keep
Most actively managed funds underperform their index after fees. A handful do beat the market over long stretches.
Funds run by managers with skin in the game, sensible fees under 0.60%, and a clear philosophy can earn a spot in a portfolio. The bar is just much higher than it used to be.
Never buy an active fund only because it had a good year. Look for a 10-year record against its benchmark, after fees.
Common Red Flags
A few warning signs show up across funds that disappoint investors.
Recent Manager Change
If the manager who built the track record just left, the fund is essentially new. Wait a few years before judging the replacement.
Sales Loads or 12b-1 Fees
Front-end loads of 3% to 5% are common in funds sold through commissioned advisers. These rarely fit the definition of excellent for individual investors who can pick their own funds.
Heavy Marketing After a Hot Year
Funds advertise hardest after strong years to attract new money. By the time the ads run, the easy gains may already be gone.
Tiny Asset Base
Funds under $50 million sometimes close because they cannot cover operating costs. Sticking with funds over $1 billion in assets avoids this risk.
Building a Portfolio Around Excellent Funds
Most long-term investors do well with just three or four funds total. A U.S. stock fund, an international stock fund, and a bond fund cover most of the world.
Adding a small piece of a real estate fund or small-cap fund can boost diversification, but it's optional. Simplicity often beats complication.
Contribute regularly through automatic transfers, ignore short-term noise, and rebalance once a year. That recipe has built a lot of retirement accounts.
Frequently Asked Questions
Are index funds always excellent mutual funds?
Index funds usually hit the low-fee and diversified boxes, which is why they show up so often. They are not automatically perfect though. A poorly chosen index can still expose you to high risk, like a single-country emerging market index. Match the index to your goals.
How many mutual funds should I own?
Most investors do fine with three to five funds. Owning 15 funds usually creates overlap and complexity without adding diversification. A simple portfolio is easier to rebalance and easier to stick with through downturns.
Should I sell a mutual fund that had a bad year?
One bad year is not a strong sell signal by itself. Check whether the strategy still makes sense and whether the manager is the same. If the answers are yes, holding through the rough patch is often better than selling at a low.
What's the difference between mutual funds and ETFs?
Mutual funds price once a day after the market closes. ETFs trade like stocks all day with constantly changing prices. ETFs tend to be more tax-efficient, while traditional mutual funds work well inside retirement accounts where you contribute on a schedule.
