2019 was a strong year for the stock market, and investors are hopeful that they'll see further gains in 2020. Mutual funds can be a simple way to build a diversified portfolio even with limited amounts of investment capital, but you have to make sure that you pay attention to costs and avoid overpaying for fund management.

Fidelity is a giant in the mutual fund industry, and it's moved aggressively to maintain its leadership role in funds by seeking ways to reduce what fund shareholders have to pay in expenses. The company came out with several offerings of mutual fund shares with no fees whatsoever, and they've gotten off to a good start. Let's take a closer look at three of them, which Fidelity investors can use to create broad-based exposure to the global stock market.

The three top Fidelity mutual funds for 2020

Fund

Assets Under Management

2019 Return

Fidelity ZERO Large Cap Index (NASDAQMUTFUND:FNILX)

$1.32 billion

32%

Fidelity ZERO Extended Market Index (NASDAQMUTFUND:FZIPX)

$486 million

27%

Fidelity ZERO International Index (NASDAQMUTFUND:FZILX)

$1.33 billion

22%

Data source: Fidelity.

How mixing and matching these three funds can build a complete stock portfolio

Ever since the creation of index mutual funds, investors have liked the fact that their management fees are so much lower than for actively managed funds. That stands to reason, though, since it takes a lot less effort and expertise to follow an index that an outside provider has created than it does to come up with your own stock picks. With many actively managed funds charging 1% or more every year in expenses, index funds across the industry have long had much lower fees of 0.1% or below.

Person looking at a four-monitor computer setup in front of a city skyline.

Image source: Getty Images.

It was only a matter of time before a major fund company found a way to eliminate fees entirely, and Fidelity was the first to popularize its ZERO line of fee-free funds. The secret that all of Fidelity's zero-fee funds use is to lend out the securities that they own in order to generate income. The money that securities borrowers are willing to pay covers Fidelity's expenses in managing the funds, leaving shareholders to pay nothing.

The three funds above work well separately, but they can fit together to create a portfolio that includes stocks from all over the world. Consider:

  • The ZERO Large Cap Index Fund consists of just over 500 stocks with the highest market capitalizations in the U.S. market.
  • The ZERO Extended Market Index Fund owns roughly 2,000 stocks in the mid- and small-cap categories, helping to fill in the gaps in domestic stocks that the Large Cap Index Fund left behind.
  • The ZERO International Index Fund goes beyond the borders of the U.S., capturing more than 2,000 top stocks in countries across the world. Japan and the U.K. have the highest allocations within the fund, but you'll also see exposure to emerging markets like China and India, as well as other economic powers across Europe, North America, and the Asia-Pacific region.

With these three funds, you can choose an asset allocation strategy that fits your particular views on where you're likely to find the best returns going forward. Typical U.S. investors would often put most of their money in the large-cap fund, with smaller allocations to the extended market and international funds. However, if you believe that the U.S. market is due to underperform its international counterparts, then assigning a larger allocation to the international fund could pay off. Similarly, large caps have done well compared to small caps lately, but if you think that trend will reverse itself, a higher allocation to the extended market fund would potentially boost your overall return.

Be smart about costs

Fidelity has a long history of providing actively managed funds designed to outperform stock market indexes, and many of its funds have been able to put together impressive track records. Yet many investors find index funds to be more predictable in the performance they deliver -- and zero costs for these Fidelity funds mean that fund shareholders get to keep every penny of what their stocks deliver in 2020 and beyond.