Mutual funds are one of the most popular investment vehicles on the market thanks to their diversification, which means your money is spread out among hundreds or thousands of companies. This protects your investments from any downturns in the market, which helps you build wealth. Instead of investing in individual stocks, mutual funds allow you to easily invest in the entire stock market — or just one sector — by investing in just one mutual fund. And with only a few mutual funds, you could build a well-diversified portfolio with multiple asset classes and a broad market exposure.

But you might be wondering, as you would for any other investment, what kind of return you can expect with mutual fund investing. Experts agree that investing is the key to building wealth, but just like any investment, there are risks. Mutual funds tend to outweigh most of the risks because of their diversification. We spoke with a couple of finance industry experts to learn what the average return is for mutual funds, as well as how those returns compare to other types of investments.

Average Returns for Mutual Funds

There are more than 7,500 mutual funds that span different sizes, investment styles, sectors, and more. As a result, it would be impossible to pin down a so-called “normal” or average return that would apply to every mutual fund. Instead, the return you can expect depends on the type of mutual fund you’re investing in.

“When people talk about ‘average returns’ they are normally referring to a certain benchmark like the S&P 500 Index,” said Ryan Ortega, a financial advisor and the founder of Third Line Financial Planning in Los Angeles.

According to the U.S. Securities and Exchange Commission, the stock market has an average historical return of about 10% per year. However, that only tells what type of return you might expect if you invested in a total market mutual fund.

When you add other types of mutual funds into the mix, the average return may look very different. After all, some mutual funds are made up of fixed-income assets with historically lower returns than the stock market. On the other hand, you might also have a mutual fund filled with small-cap stocks, which are known for greater volatility but higher growth potential.

Average returns also differ from active to passive funds. A passive fund — also known as an index fund — is one that tracks the performance of a particular index. An active fund, on the other hand, has a fund manager that actively manages it and chooses the investments. Historically, passive funds tend to outperform active ones consistently, especially over longer time horizons.

Ultimately, there’s no one average return we can apply to all mutual funds. Instead, it’s important to consider your required return — meaning the return you would need to achieve your financial goals — and the type of funds you’re invested in.

“One issue that we run into is we’ll read different articles and see different number quotes,” Ortega said. “We might see that the stock market has returned 8% over the years.”

But according to Ortega, it isn’t enough to simply compare that benchmark number to your portfolio and if your portfolio falls short, assume you’ve done something wrong.

“First, we have to understand the timeframe where that number is coming from. What start date are they using? Understand if that number is looking at stocks and bonds or only bonds. Then when you compare it to your portfolio, you can look at what assets your portfolio is holding compared to that benchmark.”

Average Returns by Sector

As we mentioned, one of the factors that influence mutual fund returns is the sector they’re invested in. Some mutual funds incorporate all 11 stock market sectors, while others may focus on just one.

Over any given timeframe, the returns of one sector can differ significantly from the returns of another. For example, according to data from the S&P Dow Jones Indices, in the 12 months preceding February 2022, the energy sector had the highest returns, with an annual average of 53.67%. On the other hand, the communications services sector had an average annual return of negative 3.64%.

Had you only invested in one of these sectors, your portfolio would have either performed really well or really poorly. However, we can never know ahead of time which sectors will perform well. As a result, financial experts generally recommend a diversified portfolio that includes exposure to all sectors so you can take advantage of large gains while somewhat insulating yourself from the effects of large losses.