Picking the right mutual fund can pay off, but just how much depends on the sector, according to Morningstar. Small-company growth funds had...
Picking the right mutual fund can pay off, but just how much depends on the sector, according to Morningstar.
Small-company growth funds had some of the widest disparities between good and poor performers, based on 10-year annualized returns through May 31.
Funds ranking in the top 25 percent gained nearly 9 times as much as those in the bottom quartile. This means $10,000 invested in a leading fund would have grown to $27,387, while the same amount in a laggard would have grown to just $11,300.
Among large-company funds with a blend of growth and value stocks — the centerpiece of many portfolios — a $10,000 investment in one of the best-performing funds would have grown to $20,306 over 10 years versus just $12,407 for a bottom-quartile fund.
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The performance gap underscores the importance of picking the right fund, says Russ Kinnel, director of mutual-fund research for Morningstar.
“If you do good research, you have a good chance of getting superior performance,” he says.
Kinnel warns investors not to simply buy today’s top performers. Instead, he suggests investors look for low-cost funds; high expenses eat away at returns without ensuring better results. He also says to focus on experienced managers.
Of course, investors can avoid the risk of returns landing in a category’s basement by opting for index funds.
Vanguard’s founder, John Bogle, has championed this approach, saying it eliminates much of the risk of investing.
Of course, while an index fund is likely to stay out of a category’s cellar, it likewise is unlikely to top the rankings.