15 Best Mutual Funds for 2021

The universe of mutual funds can be divided in different ways. For example, you might categorize funds by their focus: Some are invested in stocks, some in bonds, some in both, and some in various combinations of asset types. Another key difference among funds is whether they're active or passive. A fund with trained analysts who study lots of securities and decide which ones to buy for their fund and when to sell them is an actively managed one. A passively managed fund, on the other hand, requires little management brainpower, because it typically just mimics an index, holding most or all of the same securities, in the same proportion. A classic example is an S&P 500 index fund, which tracks the popular index of about 500 major American companies.

So which is better for you, active or passive funds? Well, passive broad-market index funds will deliver roughly the market's average return. You can aim to do better than that with some actively managed funds, but know that, on average, very few actively managed funds outperform their benchmark indexes over long periods. Many good index funds charge very low fees, while actively managed funds can charge 1% or more of assets each year.

Here's a look at some promising funds, of the actively managed and passively managed variety. For some of the passive funds, I'll include similar exchange-traded funds (ETFs).

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Let's start with passively managed index funds. The index that the most index-fund dollars are tracking is the S&P 500, which includes 500 of America's biggest companies, together making up about 80% of the U.S. market's overall value. There are lots of S&P 500 index funds to choose from, such as the Vanguard 500 Index Admiral Fund (NASDAQMUTFUND: VFIAX) and the Fidelity 500 Index Fund (NASDAQMUTFUND: FXAIX). Among ETFs, there's the SPDR S&P 500 ETF (NYSEMKT: SPY) and the Vanguard S&P 500 ETF (NYSEMKT: VOO), among others.

As of the end of 2019, the S&P 500 outperformed fully 90% of large-cap stock mutual funds over the previous 15 years, so don't think that opting for a solid index fund is any kind of bad investing compromise.

ALSO READ: 3 Great Stocks for Low-Risk Investors

While an S&P 500 index fund plunks shares of 500 large companies in your portfolio, it is focused on large companies. If you'd rather not leave out medium-sized and small companies, you can invest in a total U.S. stock market index fund, such as the Vanguard Total Stock Market Index Fund (NASDAQMUTFUND: VTSMX) -- or the Vanguard Total Stock Market ETF (NYSEMKT: VTI). (If you start wondering why you're seeing a lot of Vanguard funds mentioned in this list, it's because Vanguard has long featured low fees.)

You can get even broader than the entire U.S. stock market by investing in the entire world's stock market, via an index fund such as the Vanguard Total World Stock Index Admiral Fund (NASDAQMUTFUND: VTWAX) or the Vanguard Total World Stock ETF (NYSEMKT: VT). This is an easy (and inexpensive) way to be including shares of American, European, Asian, South American, African, and Australian companies in your portfolio -- though, of course, your stake in each of them is likely to be very, very small. Still, the fund's performance will track that of the overall world market.

The universe of mid-cap stocks is appealing because such companies have grown from young and small enterprises into larger ones -- primarily by operating successfully. In general, they're no longer as risky as they used to be and they still have a lot of room to grow. A good mid-cap index fund to consider is the Vanguard Mid Cap Index Admiral Fund (NASDAQMUTFUND: VIMAX), which tracks the CRSP U.S. Mid Cap Index and sports a low expense ratio (annual fee) of just 0.05% and a 10-year average annual return of 12.3%. Its top sectors are technology and healthcare. Another option is the Schwab U.S. Mid-Cap ETF (NYSEMKT: SCHM), with an even lower fee, of 0.04%.

ALSO READ: 3 Growth Stocks I'd Buy Right Now

Small companies have the ability to grow much more briskly than their larger counterparts, though some don't end up succeeding over the long run. A good small-cap index fund to consider is the Vanguard Small-Cap Index Fund (NASDAQMUTFUND: VSMAX), which tracks the CRSP U.S. Small Cap Index, featuring stocks among the smallest 85% to 98% of the market (by market capitalization). It charges an annual fee of 0.05% and has averaged annual gains of 11.8% over the past decade. An ETF option is the iShares Core S&P Small-Cap ETF (NYSEMKT: IJR).

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Over long periods, bonds outperform stocks handily, but many people still like to include some bonds in their portfolios, for diversification. An easy -- and inexpensive -- way to do so is via the Fidelity U.S. Bond Index Fund (NASDAQMUTFUND: FXNAX). It tracks the Bloomberg Barclays U.S. Aggregate Bond Index, which is full of investment-grade U.S. dollar-denominated bonds with at least one year until maturity. Recently, 46% of its assets were in government bonds, along with 25% in corporate bonds and 27% in securitized debt such as mortgage-backed securities. An ETF alternative is the Vanguard Intermediate-Term Bond ETF (NYSEMKT: BIV).

Now let's look at some promising actively managed mutual funds, starting with a solid dividend-focused one, the Vanguard Dividend Growth Fund (NASDAQMUTFUND: VDIGX). Its annual fee is just 0.27%, which is very low for an actively managed fund, and its 10-year average annual return is 13.1%. Recent top holdings included McDonald's, UnitedHealth Group, and Nike. Dividend-paying stocks tied to healthy and growing companies are great, because not only will the stock prices grow over time, but so will the dividend payouts. A good ETF focused on dividends is the Vanguard Dividend Appreciation ETF (NYSEMKT: VIG).

ALSO READ: 3 Dividend Stocks That Should Pay You the Rest of Your Life

If you want a well-diversified portfolio, you should consider including some real estate holdings, such as real estate investment trusts (REITs). REITs are typically companies that own many properties, often focused on a sector such as medical buildings, apartments, or retail. They collect rents and pay out at least 90% of their income to shareholders. A fine mutual fund focused on real estate is the DFA Real Estate Securities I Fund (NASDAQMUTFUND: DFREX), which sports a low annual fee and a 10-year average annual return of 9.15%. Its holdings span many different kinds of properties, including specialty REITs such as ones focused on data centers. For an ETF alternative, check out the Vanguard Real Estate ETF (NYSEMKT: VNQ).

Healthcare is another major part of our economy, and if you don't have the time, skills, or interest to study the universe of healthcare stocks and make your own buy-and-sell decisions, you might opt for a mutual fund that does the work for you. A good portfolio candidate is the Fidelity Select Health Care Fund (NASDAQMUTFUND: FSPHX), which sports a low annual fee and a 10-year average annual gain of 19%. Its top holdings recently included UnitedHealth Group, Roche Holding, and Humana. For an ETF alternative, look into the Vanguard Health Care ETF (NYSEMKT: VHT).

It's no secret that the universe of tech-heavy stocks is one capable of above-average growth. Many of the biggest companies in the world are in this universe, and you can be instantly invested in a wide range of them via a mutual fund such as the Fidelity Select Software & IT Services Portfolio Fund (NASDAQMUTFUND: FSCSX). Like other funds recommended here, it sports a relatively low annual fee and solid performance -- averaging annual gains of 20.8% over the past decade. Its top holdings recently included Microsoft, Visa, and Adobe Systems. A solid technology-focused ETF to consider is the Vanguard Information Technology ETF (NYSEMKT: VGT).

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Many technology-focused mutual funds (and ETFs) are heavily weighted in just a few leaders, such as Microsoft and Apple. If you'd like to give somewhat smaller technology stocks more influence in your fund, consider the Morgan Stanley Insight A Fund (NASDAQMUTFUND: CPOAX), with a relatively low annual fee and a 23.5% annual average gain over the past decade. Its recent top holdings include Zoom Video Communications, Square, and Shopify. For an ETF focused on newer, innovative companies, check out the ARK Innovation ETF (NYSEMKT: ARKK).

ALSO READ: 3 Tech Dividend Stocks to Buy for 2021

Many investors look at China and drool, given the country's burgeoning economy and its population of roughly 1.4 billion people -- more than four times that of the U.S. Of course, studying the universe of U.S. stocks is a daunting enough proposition, and beyond the ability of many investors -- doing so with the universe of Chinese stocks is far harder. Enter mutual funds focused on China -- such as the Matthews China Investor Fund (NASDAQMUTFUND: MCHFX), with a relatively low annual fee and a 10-year average annual growth rate of 7.3%. (Its 15-year average is closer to 13%.) Its top holdings recently were Tencent Holdings, Alibaba Group, and JD.com. A good China-focused ETF is the S&P SPDR China ETF (NYSEMKT: GXC).

If you'd like a more diverse group of foreign stocks in your portfolio, consider the Vanguard International Growth Investor Fund (NASDAQMUTFUND: VWIGX), which includes among its holdings companies from China, the U.S., South America, Europe, and elsewhere. (U.S. stocks recently made up only 11.5% of the fund's assets.) Its 10-year average annual growth rate is 12%, and its fees are relatively low. For an ETF alternative, look at the Vanguard FTSE All-World ex-US ETF (NYSEMKT: VEU), which invests in most foreign stocks and makes a point of excluding U.S. stocks. It's an index fund, including companies from emerging, developing, and developed economies.

You might also consider "balanced" mutual funds, which offer a mix of both stocks and bonds. The American Funds American Balanced F2 Fund (NASDAQMUTFUND: AMBFX), for example, aims to have between 50% and 70% of its assets in stocks. It recently had about 57% of its assets in stocks, and 33% in bonds (with about 9% in cash). For an ETF alternative, consider the iShares Core Moderate Allocation ETF (NYSEMKT: AOM).

ALSO READ: The Best Way to Prepare for a 2021 Market Crash

Consider value-oriented mutual funds for your portfolio, too. After all, many of the best investors ever, such as Warren Buffett, espouse value investing. A good fund to take a look at is the Dodge & Cox Stock Fund (NASDAQMUTFUND: DODGX), with a low annual fee and a 10-year average annual gain of 12%. Its top holdings recently included FedEx, Google parent Alphabet, and Capital One Financial. A value-oriented ETF to consider is the Vanguard Value ETF (NYSEMKT: VTV).

5 Winning Stocks Under $49
We hear it over and over from investors, “I wish I had bought Amazon or Netflix when they were first recommended by the Motley Fool. I’d be sitting on a gold mine!” And it’s true. And while Amazon and Netflix have had a good run, we think these 5 other stocks are screaming buys. And you can buy them now for less than $49 a share! Simply click here to learn how to get your copy of “5 Growth Stocks Under $49” for FREE for a limited time only.

Clearly, there are gobs of different kinds of mutual funds, and the ones recommended above are far from the only funds that could serve you very well. If you find yourself overwhelmed and confused, consider just sticking with the first fund mentioned -- a simple, broad-market index fund based on the S&P 500.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Selena Maranjian owns shares of Alphabet (A shares), Alphabet (C shares), Apple, JD.com, Microsoft, Roche Holding Ltd. (ADR), Shopify, Square, and Tencent Holdings. The Motley Fool owns shares of and recommends Adobe Systems, Alibaba Group Holding Ltd., Alphabet (A shares), Alphabet (C shares), Apple, FedEx, JD.com, Microsoft, Nike, Shopify, Square, Tencent Holdings, Vanguard Intermediate-Term Bond, Vanguard REIT ETF, Visa, and Zoom Video Communications. The Motley Fool owns shares of iShares S&P SmallCap 600 Index, Vanguard Dividend Appreciation ETF, Vanguard S&P 500 ETF, and Vanguard Value ETF. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.